Turkey’s inflation expectations  out of control, TL to depreciate further vs USD

Turkey’s inflation rate is expected to end the year at 70.6 percent, according to the average estimate in a monthly central bank survey of market participants.


The August forecast for December inflation compared with a prediction of 69.9 percent in July, the survey, published on Friday, showed. It was the slowest deterioration in inflation expectations since February 2021, but the highest forecast, too.


The Central Bank of the Republic of Turkey (CBRT) predicts that inflation – which soared to nearly 79% in June – will reach 60.4% by the end of 2022, up from its 42.8% forecast three months ago.


That is according to the monetary authority’s quarterly inflation report. The bank cited rising costs of imports and the impact of a weak Turkish lira and said it sees consumer inflation gradually falling to single digits in two years.

Turkey’s consumer price inflation accelerated to 79.6 percent last month, the highest annual rate since 1998. Foreign financial institutions expect annual inflation to start slowing after October or November due to favorable so-called ‘base effects’ from the same period a year earlier.


Expectations for year-end inflation in 2022 had stood at 30.3 percent in January.


The average prediction for the lira’s value against the dollar at the end of the year stood at 19.5994 compared with 19.2087 in July. The lira, which has lost more than a quarter of its value this year, was trading down 0.1 percent at 17.96 per dollar on Friday.


The lira will probably end the year at 19.5 per dollar and weaken to 21 per dollar by the end of June next year, British bank HSBC said this week, according to BloombergHT television. The bank said it expected the lira to depreciate more sharply in the autumn when seasonal tourism revenues would be less supportive and exports weaker due to the recession pressure in Europe.


Forecasts for annual economic growth this year improved to an average of 3.6 percent compared with 3.5 percent in July.

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Predictions for the year-end current account deficit stood at an average $39.3 billion compared with $37.5 billion in July.


Commentary by Ozlem Derici Sengul: Market’s year-end expectation rose to 70.6%

August Market Participants Survey revealed that the end year inflation expectation in the market rose to 70.6% from 69.94% a month ago. This is slightly higher than our expectation of 68.2%.

Note that CBRT also revised up its end year inflation expectation to 60.4% in its 3rd Inflation Report of the year from 42.8%. 12-month and 24-month forward inflation expectations also increased from 40.23% and 24.27% to 41.99% and 24.35%, respectively.


Under the assumption that the average 2Y benchmark bond interest rate in August was 20.5% and the actual inflation rate stood at 80% in August, the ex-ante real interest rate will decline further from -12.3% to -15.1%, and the ex-post real interest rate from -31.5% to -33.0%. The market, which does not expect a change in the policy rate for the next 6 months, expects 14.0% policy rate to rise to 16.5% in the next 12 months, while it was 15.0% in the previous month’s survey. Market expects policy rate to be 19.90% in the next 24 month period. End year USDTRY rate expectation in the survey rose to 19.648 from 18.998 while our expectation is around 18.5. 12 month ahead exchange rate expectation rose to 22.026 from 20.921.

End year GDP growth expectation by market participants is 3.69% in August, up from 3.63% a month ago while next year GDP growth expectation remained almost unchanged at around 3.80%. Current account deficit is expected to be USD39.3bn at the end of this year which is close to our expectations while previous month’s deficit expectation was USD37.5bn.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.