Turkey: Inflation well ahead of interest rates

Turkey's spiral of inflation in the axis of external factors and internal pricing developments continues. Accordingly, we expect the upward trend in the inflation to be announced in April as well. It is clear that the Turkish economy, which has faced the highest inflation rates since 2002, is not pr...

Turkey's spiral of inflation in the axis of external factors and internal pricing developments continues. Accordingly, we expect the upward trend in the inflation to be announced in April as well. It is clear that the Turkish economy, which has faced the highest inflation rates since 2002, is not proactive enough to react against it. Accordingly, the latest guidance we received from the Central Bank reveals that there will be no interest rate response in the near future and that the process is desired to be managed with policies and macroprudential measures in line with the growth targets of the economy management.

Inflation will not trigger a rate hike at the central bank. Inflation, which reached 61.1% in March, is 47.1 points above the benchmark policy interest rate, and the expected increase in inflation may further deepen the negative real interest effect and cause new inflationary pressures due to the use of TRY loans and the decreasing attractiveness of TRY savings. Although the usual suspect in inflation seems to be the global rise in energy prices as of March, much of the increase towards current inflation rates from September to February has already occurred, and current factors point to marginal effects rather than the actual inflation trend. Deteriorating pricing mechanics and ever-increasing forward-looking inflation expectations pose risks regarding inflation inertia.

As the factors brought about by the Ukraine war are added to the push of commodity prices further, the costs and, accordingly, the final prices will continue to be affected. We expect inflation to rise to 66.7% in April. This realization of inflation will also deepen Turkey's real interest rate at the lowest level among the major emerging markets.

The central bank raised its year-end inflation forecast to 42.8% from 23.2% in January. We consider both this short-term target and the medium-term target, which is seen as 5% beyond 2024, to be quite optimistic in terms of the current economic structure, broad policy practices and uncertainties, and we approach forward-looking estimations more cautiously. Despite seeing a 20-year peak in inflation, it is unlikely that the central bank will raise interest rates to control inflation. The government, on the other hand, is in favor of applying low interest rates to support economic growth, but does not believe that high interest rates can prevent high inflation. On this basis, macroprudential measures, TRY-based financial products to compensate for the increase in exchange rates, regulations against foreign exchange and price control mechanisms are adopted in the fight against inflation. We consider that these economic practices are insufficient to eliminate the main causes of inflation.

Our forecast horizon is that the levels reached in inflation or higher will continue until the last months of the year. In the estimation path of the central bank, it is predicted that inflation will converge to 75% in May. At the end of the year, we expect inflation to be close to the 55-60% band due to the base effect that will last month.

Kaynak Tera Yatırım
Hibya Haber Ajansı

29 Nis 2022 - 21:23 - Dünya



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