INFLATION AUGURS A HARD LANDING

Dünya Executive - - OVERVIEW -

Expectatio­ns for Turkey’s end-2018 inflation rate rose from 12.28 percent in June to 13.88 percent in July, the Central Bank’s regular survey of businesses and analysts showed on July 18. Participan­ts of the survey also expected the Monetary Policy Committee (MPC) to hike the key policy rate from its current 17.75 percent to 18.39 percent at the next monetary meeting to be held on July 24.

Capital Economics had already penciled in a 100bp interest rate hike in response to June’s sharp rise in inflation. End-2018 inflation expectatio­ns fell to as low as 9.49 percent in March. Subsequent­ly, sharp increases were recorded over the following four months, mainly due to the nosedive of the Turkish lira (TRY) amid the overheatin­g Turkish economy. The latest GDP data released on June 11 showed Turkey was continuing to grow at “warp-speed” in the first quarter. But there are fears it’s in for a hard landing.

The Central Bank’s inflation target for 2018 remains 5 percent. The regulator lifted its CPI inflation forecast for 2018 to 8.4 percent in its latest inflation report from the previous estimate of 7.9 percent given in the January. The increase was confirmed by Central Bank governor Murat Cetinkaya on April 30. Turkey’s annual consumer price inflation jumped from 12.15 percent in May to 15.39 percent in June, taking the rate up to the highest level recorded since 2003, the Turkish Statistica­l Institute (TUIK) announced on July 3. Turkey’s Central Bank on June 7 surprised markets by announcing a 125bp hike in its main policy rate to 17.75 percent, a tightening that was in excess of expectatio­ns.

Although Turkey’s double-digit inflation is worsening and the country’s current account deficit is one of the widest in the world, President Recep Tayyip Erdogan continues to press for lower interest rates. Analysts warn that this is wrong-headed because the overheatin­g economy needs to cool off. Concerns over overheatin­g, the collapsed TRY and deteriorat­ing double-digit inflation have driven a series of downgrades of the country’s sovereign ratings by ratings agencies. Fitch cut Turkey further into junk, two notches below investment grade, on July 15. Fitch forecasts annual average inflation will be 13 percent in 2018.

The Central Bank survey respondent­s also said that they expected the USD-TRY rate to be 4.83 at the end of this year, a significan­t weakening from the 4.58 anticipate­d in the June survey. Moreover, they forecast that GDP growth would be 4.2 percent this year; that represente­d no change compared to the June survey. Turkey’s GDP growth is expected to ease to 4.1 percent this year from last year’s breakneck pace of 7.4 percent, according to a Reuters poll of economists published on July 16.

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