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The swans' cry of Turkish disinflation (Daily analysis 5.07.2023)

5 Jul 2023 9:57|Bartosz Sawicki

Turkey's inflation rate hit a 25-year high of 85.5 pct in October last year. June was the eighth consecutive month of price growth deceleration, and CPI edged lower to 38.2 pct year–on–year and came in below expectations. Nevertheless, there is little reason for optimism.

In the year's second half, the re-acceleration of price pressure seems almost inevitable. June was the last month in which inflation dropped in the year-on-year terms. Even then, consumer prices jumped by 3.9 pct month-on-month, the second highest last year. The lira freefall starts to take its toll once again as it reignites cost pressures.

The Central Bank of the Republic of Turkey’s interventions combined with numerous foreign exchange restrictions were used to artificially stabilise the lira ahead of the May elections. Such efforts always come at a cost: the central bank's foreign exchange reserves have been severely depleted. Since Recep Erdogan secured re-election, the lira has lost ground again, depreciating by almost 25% against the dollar and recently trading at all-time lows. One of the most severe TRY collapses in the last decade is mainly responsible for the rise in core inflation from 46.6 to 47.3 pct year-on-year.

However, the lira's demise is not the only source of inflationary pressures. Inflation expectations refuse to grind lower in the permanently profoundly negative real interest rates and an overheated economy. The government policies, namely a 34 pct minimum wage hike and a possible overhaul of administered prices and tax rates, which were postponed due to looming elections, should contribute to the return of the inflation rate towards the 50 pct mark in the second part of the year.

At newly established Governor Hafize Erkan's first meeting, the central bank opted for a gradual tightening and hiked the one-week repo rate from 8.5 to 15 pct. We believe the interest rates are set to rise to at least 25 pct in the remainder of the year, yet more restrictive monetary policy will need time to take effect and outweigh the weakness of the lira. Conotoxia’s FX forecast shows no respite for the Turkish currency and assumes that the USD/TRY rate will touch the 30 mark next year.

5 Jul 2023 9:57|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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