According to the Market Participants Survey published monthly by Central Bank of Turkey (CBRT), year-end inflation expectations decreased from 68.0% in November to the 67.2% level registered in September. Thus, inflation expectations showed a slight improvement after increasing for 5 consecutive months. As a reminder, the CBRT increased its year-end inflation projection from 58.0% to 65.0% and its next year-end target from 33.0% to 36.0% in its latest Inflation Report.
CBRT gains some credibility
The fact that 12 and 24-month forward inflation expectations have also decreased may indicate that the CBRT’s communication regarding inflation is reflected in the expectations. Improvement in expectations in the coming months will strengthen our belief in CBRT’s ability to steer inflation expectations lower, a key component of any tight monetary policy regime.
We see that 12 and 24-month forward inflation expectations decreased slightly from 45.3% and 25.8% to 43.9% and 25.1%, respectively, in November.
More rate hikes baked in
Market participants expect CBRT policy rate to increase from 35% to 37.80% on average at the Monetary Policy Committee meeting to be held on November 23, and that interest rates will continue to increase after this month to rise to 40.0% in the next 3 months. Our expectation is that the interest rate will be increased to 37.5% at the November meeting and to 40.0% in December.
On the other hand, the fact that the 12-month forward policy rate expectation is at 37% reflects the expectation of most participants that interest rate cuts will begin in the next 12 months. The 24-month forward policy rate expectation is 25.0%. The decrease in the policy rate expectation from 27.8% in the previous month to 25.0% also reflects the expectations that the CBRT will abandon its tight monetary policy in the medium term.
In the November survey, the year-end USDTRY exchange rate forecast decreased from 30.045 to 29.996, while the 12-month forward exchange rate expectation increased from 38.645 to 39.618. The lower rate of currency depreciation implied by forecasts suggest that CBRT’s concealed crawling peg policy, too, has some credibility. This should stabilize inflationary pressures, and mitigate the potential for sudden dollarization in winter months.
In the November survey, this year’s growth expectation remained almost the same at 4.1%, while the current account deficit expectation decreased from 45.936 billion dollars to 45.722 billion dollars. Growth expectation for the end of next year decreased from 3.42% to 3.33%; Current account deficit expectation decreased from 35.387 billion dollars to 34.660 billion dollars.
In as much as Erdogan and Mehmet Simsek claim the economic stability program will be costless in terms of growth, the viewpoint is not shared by market participants. The substantial decrease in 2024 current account deficit is a welcome development, in the sense of reduced need for external borrowing.
Research note by Dinamik Yatirim brokerage, commentary by PA Turkey editors
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