Turkey: Inflation and policy rate gap to deepen

The central bank has been inactive for several months and probably will continue to do so, and as a result, there is a concept of increasing inflation. In this context, our general expectation is that the situation in inflation will continue to be critical, the rise will be at the forefront for a few more months, and the July inflation will exceed the 80% band and peak again. We expect Turkey’s consumer price inflation to rise to 81.3% in July, as the central bank’s inaction in its main policy arm keeps prices unchecked.

It does not seem possible for the central bank to trigger a new policy move to stop inflation. Since the beginning of 2022, the policy rate has remained at 14%, while the policy rate adjusted for inflation is -64.6%. As a result of the expected increase in inflation in July and the lack of monetary policy against it, the negative real interest rate effect will deepen even more and will continue to be the lowest among the major emerging markets. If inflation comes in line with our expectations in July, it will bring the inflation-adjusted interest rate to -67.3%.

Consumer price inflation in Turkey reached 78.6% in June, almost 16 times the target, which was the highest level in 24 years. The political authority and the economy management deem even lower interest rates necessary to produce growth-supported policies. We think that the Central Bank of the Republic of Turkey will continue its loose monetary policy that supports this growth perspective, and we do not expect it to tighten interest rates in the face of increasing inflation.

We present the upside risks of inflation due to the current dynamics, economic structure, import costs, broad policy implementations and the stagnation of inflation. We do not expect the central bank to raise interest rates at its next August meeting. In the fight against inflation, macroprudential measures, TRY-based financial products to compensate for the increase in exchange rates, regulations against foreign exchange and price control mechanisms are adopted. Conditions where prices erode household budgets and cause insufficient demand shocks in the economy gain weight. In such an environment, the story of high inflation and low growth may be valid for Turkey. With the unstable expectations and the weakening lira feeding the prices further, we expect inflation to peak around 85% in 3Q22 in line with the path outlined in the Inflation Report presentation (probably in September) and finish the year at 73%,

Kaynak Tera Yatırım
Hibya Haber Ajansı