August inflation will be announced today. We will see whether the downward trend in inflation, which was 1.78 percent monthly and 31.75 percent annually in July, continues.
The expectation is that inflation will increase around 1.7-2 percent in August. In such a realization, annual inflation will remain around 31.5 percent. Expectations for the end of the year are concentrated in the 29-30 percent band. Before today's data, the figure from Istanbul also gave an important sign. Retail prices in Istanbul increased by 1.66 percent in August, and annual inflation was 34.96 percent. It is especially positive that the monthly increase in food prices is limited to 0.20 percent. On the other hand, the increase in education exceeding 17 percent shows that services inflation will continue to be monitored in the coming months.
The real question is: Will August inflation bring interest rate cuts?
The Central Bank will make the interest rate decision on September 10. The policy rate is currently 37 percent. Recently, a tight stance has been maintained due to the risks posed by war and oil prices. With the resumption of one-week repo auctions, some normalization was achieved in funding. But will this lead to an immediate interest rate reduction? We will see.
The main expectation is that the interest rate will be kept constant at 37 percent on September 10. The fact that August inflation is around 2 percent will not change this expectation significantly.
Because the Central Bank is no longer only concerned with inflation. The course of the war, oil prices, exchange rates and global interest rates are also in the decision equation. Especially high oil prices create a new cost pressure on inflation. Therefore, the October and December meetings are stronger candidates for interest rate cuts. If geopolitical tension decreases, oil eases and disinflation continues, a total reduction area of 200-300 basis points may occur by the end of the year. So, will this discount be enough for those spinning the wheels? Of course not. The business world, which met with the economic management for the preparations of the Medium Term Program covering the years 2027-2029, which will be announced on Sunday, September 6, expressed all their problems. Let's see what kind of framework will be drawn for 2027 in the MTP? What action plans will be put into effect to relieve the real sector?
WILL OIL DRIVE THE WORLD INTO RECESSION?
Oil has once again become one of the risks facing the world economy. From the messages of Fed Chairman Kevin Warsh to the assessments of G20 central banks and finance ministers, the common concern is the same: If the war drags on and oil remains high, the fight against inflation will become even more difficult. While Brent oil approached 97 dollars yesterday, it fell back to around 94 dollars. However, the problem is not that oil is 94 dollars one day and 97 dollars the next. How long these levels will be maintained.
Because the rise in oil prices creates a classic supply shock. As costs rise, from energy to transportation, from production to food, inflation is being fed again. Central banks, on the other hand, have limited capacity to combat supply-driven inflation.
Moreover, there is a second problem. As inflation concerns increase, bond interest rates rise. As the US 10-year bond interest approaches 4.80 percent, we see similar pressure from the UK to Australia and major Asian economies. Such an environment narrows the scope for central banks to reduce interest rates and even raises the possibility of increasing interest rates again.
This is where the risk of recession begins.
High energy costs on one side, high interest rates on the other... Companies' costs are increasing, consumption and investments are slowing down. Growth loses strength before inflation falls. For now, the use of strategic oil reserves and the measures taken limit the impact of the shock. However, if the war drags on and oil remains at these levels, the question before the world economy is "When will inflation fall?" may cease to exist.
It may be replaced by a much more difficult question: Will a recession begin before inflation falls?
