Turkey’s inflation outlook worsens, bond yields rise

Expectations for consumer price inflation in Turkey are worsening, according to the monthly survey by the central bank.

Consumer price inflation is expected to be 10.22 percent by December, the central bank said on Monday, citing the July poll of finance industry professionals and business leaders. CPI was seen at 9.54 percent in a previous survey in June. 

The central bank left interest rates on hold at 8.25 percent at a meeting of its Monetary Policy Committee last month, citing inflationary pressures. It has slashed the benchmark interest rate from 24 percent in July last year, when President Recep Tayyip Erdogan sacked and replaced its governor for failing to support his government’s pro-growth economic policies.

Inflation in Turkey accelerated to 12.6 percent in June from 11.4 percent in May. The central bank currently forecasts year-end CPI of 7.4 percent but is widely expected to revise that figure upward.

The weighted cost of central bank funding was seen at 7.74 percent by the end of July, little changed from the end-June prediction of 7.76 percent made in the same survey last month. That suggests that the survey’s participants expect no change in monetary policy when the central bank’s managers meet on interest rates on July 23.

As survey participants  anticipate a delayed tightening cycle by Central Bank, they increased their year-end dollar/TL forecast from 6.99 to 7.02, with 12-mth forward rate   prediction rising from 7.22 to 7.26.  The growth outlook remains pessimistic, with an average forecast of %1.37 contraction.  Yet, participants still cling to the theory of a  V shaped recovery with a 4.65% GDP hike in 2021.

The central bank’s ability to set interest rates is being undercut by the government. Erdogan says higher interest rates are inflationary, a view that jars with conventional economic theory that increasing interest rates are a tool for combating price increases.

The lira was expected to trade at 7.0188 per dollar by the end of the year compared with 6.992 per dollar in the previous survey in June. The lira fell less than 0.1 percent to 6.85 per dollar on Monday.

The current account may post a deficit of $14.64 billion this year, the central bank said, citing the survey. The deficit was predicted at $11.59 billion in the June poll. Imports into Turkey have been rising at a faster pace than exports from the country in recent months, leading to deficits in the current account.

Predictions for economic growth this year remained unchanged from June at a negative 1.3 percent. The estimate had stood at 3.4 percent growth in January. The International Monetary Fund is predicting an economic contraction of 5 percent for 2020.

Erdogan said this month that he expected strong economic growth in the second half of the year as the country recovered from the COVID-19 pandemic. The government has sought to stimulate economic activity by flooding the economy with cheap lending from state-run banks and has instructed banks to defer the debt payments of businesses and consumers.

The survey was greeted with dismay in TL-denominated government bond market, with 2 year and 10 year yields soaring by %2.3 and %3 respectively vis-a-vis Friday.

Turkey’s run-away budget deficits are also contributing to the bond market correction, which deficit may jump from 3% in 2019 to  6-8%  of GDP by end-2020. There is no consensus forecast for budget deficits.

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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.