Don’t expect Turkey’s Erdogan administration to take real measures to fight rampant inflation until after next spring’s local elections.

That’s the advice of Kerim Rota, a former senior banker now with the opposition Future Party, as relayed by Turkish economist and economic commentator Mustafa Sonmez in Al-Monitor.

Sonmez noted how two months after the appointment of a new team to fix the inflation-riddled Turkish economy, price increases are on the rise—official annual inflation moved up from 38% in June to 48% in July. He also pointed out how Ankara continued to rely on market interventions and restrictions to ease economic woes rather than restoring free market functionality.

Rota was cited by Sonmez as saying that Turkey’s financial markets are still far from appealing to foreign investors despite the appointment of the new economic leadership. That’s despite it being helmed by treasury and finance minister Mehmet Simsek and central bank governor Hafize Gaye Erkan, two ex-Wall Street bankers regarded as market-friendly and capable of persuading strongman Erdogan to drop the ‘Erdoganomics’ that in large part have turned Turkey into an economic basket case. 

“Two months have passed since the Erkan-Simsek duo came in, but Turkey remains without a free market where foreigners can trade, except for the stock exchange,” Rota was quoted as saying, adding: “The foreign currency market remains under control. The swap market is closed to foreigners. The deposit and credit market is under heavy restrictions, and the sums coming on to the stock exchange are often very limited.”

Under Erkan and the new conventional economics that now supposedly apply to Turkey, the policy rate has moved up to 17.5% from 8.5%, but at the same time inflation is resurgent and the central bank has more than doubled its year-end inflation forecast to 58%. Those who put money on lira deposits and government bonds in the past three months saw their investment overtaken by inflation, with a real-income loss of nearly 10%. The next central bank rates meeting is on August 24, but there is no expectation of a drastic rate hike.

Sonmez also observed that the government has continued to intervene in the forex market via state banks that prop up the lira—the banks, which halted frequent regular interventions after the post-national elections appointment of Simsek and Erkan in June, reportedly re-entered the market in July.

Erdogan is intent on winning back the Istanbul and Ankara municipalities from the opposition in the March polls that are now not much more than half a year away and, said Sonmez, “the government’s economic decisions appear designed to do no harm to Erdogan’s election strategy rather than restore market functionality. Such interventions and restrictions, however, threaten to exacerbate Turkey’s economic fragilities.”

Rota makes the case that Simsek has surrendered to Erdogan’s election calendar. “The previous economic management made wrong diagnoses and applied wrong remedies,” he was further reported as saying. “The current one improved the diagnosis a bit, but there is no remedy in place. Inflation is left unchecked. There is no real fight against inflation.”

According to Rota, Simsek’s recent remark that inflation will start to decrease in the middle of 2024 signals that real measures to curb inflation will come only after the elections. 

Nevertheless, Simsek and Erkan are clearly making the case that the train bound for a new Turkish economic future is set to depart the station.

On August 4, the duo essentially spent the day urging global investors at a meeting hosted by JPMorgan to get onboard, or come to regret a missed opportunity.

The FT wrote on August 2 that “there is now some optimism that Simsek and Erkan are the real deal in ensuring Erdogan sticks to the interest rate 180 degree handbrake turn”, referencing the jettisoning of the strongman’s quack, wrong-headed approach of refusing to raise rates because the move would—he insists, despite all received wisdom—push up inflation.

Turkey watchers know we’ve been here before with Erdogan—the man can and does change his mind, leaving old hands on the markets gobsmacked in the process—but the theory doing the rounds this time is that he knows that any more fooling around on his part could prove fatal.

As Timothy Ash at BlueBay Asset Management wrote in a note to investors after the JPMorgan-hosted meeting: “Turkey faces/faced falling off a cliff into a systemic crisis akin to 2000/01 if the pre-[May]election policies continued.”

“I think there has been a changing of respective powers of advisers around Erdogan,” added Ash. “The rational/technocratic Bayraktars [] are increasingly taking a bigger role, more trusted by Erdogan and he is listening. I think they are telling truth to power… and that’s behind the policy 180 and key appointments. The new team are impressive and can design a route out of crisis.”

Source: Intellinews

The post Erdogan Won’t Allow Real Fight Against Turkey’s Inflation Till Local Poll Battle is Over Investors Warned appeared first on Ankara Haftalik.

Türkiye’s central bank is forecast to deliver another sharp interest rate hike this week, according to surveys and economists, as it continues to tighten policy in a bid to conquer soaring inflation.

After years of pursuing loose policy, the central bank reversed course after May’s elections and began lifting rates to bring down inflation, which touched 61.5% in the 12 months to September.

The median estimate of 20 economists in a Reuters poll for the policy rate was 35%, up from the current 30%. Four economists forecast a hike of 250 basis points and one expected a lift of 300 basis points.

“The central bank’s focus has remained on anchoring inflation expectations and achieving disinflation… A hike to 35% would lead to a positive ex-ante real policy rate based on the 33% inflation forecast for 2024 in the medium-term plan,” ING wrote in a research note.

Morgan Stanley economists also foresee a 500-basis-points rate hike due to upward risks in inflation and said on Monday they see price increases probably easing in October.

“However, we see that headline inflation will rise to 67.1% by the end of the year and peak at 73.4% in May 2024,” they said in a note.

Since June, the central bank has turned its focus to disinflation and lifted its policy rate by 2,150 basis points while other macroprudential measures such as credit tightening to cut domestic demand were also put in place.

The bank is likely to repeat its intention to implement additional tightening measures in interest rates and macroprudential tools to guide inflation expectations and support de-dollarization efforts, Morgan Stanley analysts said.

Although recent data indicate some moderation in domestic demand, the impacts of the interest rate hikes implemented since the August Monetary Policy Committee (MPC) meeting are yet to be fully seen, they noted.

The median forecast in the Reuters poll for the year-end policy rate was 35%. The central bank is expected to hike rates further to 40% in the first half of next year, the poll also showed.

Further depreciation in the Turkish lira and increases in taxes and fees have fanned inflation despite tighter monetary policy.

Inflation is seen remaining elevated through the rest of this year, ending 2023 at 69.3%, the median of the poll of 10 institutions showed. Estimates in the Reuters poll ranged between 64.6% and 73.0%.

Inflation is forecast to stand at 43.4% at the end of 2024 and 25.3% at end-2025, according to the poll.

It touched a 24-year high of 85.5% last year after interest rate cuts sent the lira down 44% in 2021 and another 30% in 2022. The lira has depreciated more than 30% of its value so far this year.

In the Reuters poll, Türkiye’s economy is expected to grow 4% this year, according to the median of 33 economists, with the help of domestic demand in the first half despite devastating earthquakes in February, monetary tightening and a global slowdown.

The government had forecast growth of 4.4% this year.

The median growth forecast stood at 2.9% for 2024 and 3.8% for 2025 in the poll, compared to the government’s forecast of 4.0% and 4.5% respectively.

Türkiye’s current account deficit in 2023 is expected to be 4.6% of gross domestic product (GDP), the median forecast showed, compared to a government forecast of 4%.

The deficit was seen at 3.1% in 2024 and 2.5% in 2025, compared to government predictions published in September of 3.1% and 2.6%, respectively.

Morgan Stanley analysts see the balance registering a surplus in September and October and end the year with a deficit of $44 billion.

Source: Daily Sabah

The post CBRT Expected to Deliver Another Hefty Hike to Conquer Inflation appeared first on Ankara Haftalik.

Turkey hikes interest rate to 25 percent, investors who say Ankara must move away from past policies welcome move.

Turkey’s central bank on Thursday raised the interest rate to 25 percent in a surprise move that signals a continued move away from previous policy, which focused on keeping interest rates low.

The hike of 7.5 percentage points follows a raise to 17.5 percent from 15 percent last month.

“Recent indicators point to a continued increase in the underlying trend of inflation,” the central bank said.

“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” it said.

The Turkish lira gained 1.5 percent against the dollar after the bank’s clear signal that it was stepping up its fight against inflation and attempts to support the troubled currency.

Capital Economics analyst Liam Peach said that the rate increase was “much larger-than-expected” and “will go a long way towards reassuring investors that the shift back to policy orthodoxy is on track”.

Many economists disagreed with Turkish President Recep Tayyip Erdogan’s previous monetary policy, which was regarded as unorthodox.

However, Erdogan infused his government with market-friendly faces after winning a difficult May election that came in the heat of one of Turkey’s most dire economic crises in decades.

They immediately set off on a new battle against inflation that peaked at an annual rate of 85 percent last October and is on the rise once again.

The team allowed the lira to start depreciating against the dollar in a bid to ease pressure on depleted state coffers.

They also imposed a series of more technical steps aimed at balancing the economy and restoring the trust of both consumers and Turkey’s foreign investors.

A new national approach to economics

The central bank increased its key rate to 15 percent from 8.5 percent at the first meeting chaired by former Wall Street executive Hafize Gaye Erkan in June.

Erdogan had pushed the nominally independent institution to slash borrowing costs out of a lifelong belief that high-interest rates cause, rather than cure, inflation.

But Erkan and Finance Minister Mehmet Simsek, a former deputy prime minister who returned to the cabinet in June, had advocated a more go-slow approach in the past two months that tried to restore market confidence without causing too much short-term pain.

That appeared to change when July’s annual inflation rate soared back to 47.8 percent thanks to billions of dollars in social spending Erdogan meted out during his election campaign.

The central bank expects the annual inflation rate to peak at 60 percent between April and June of next year.

“There remains a large gap between the policy rate and both current and expected inflation,” ING bank’s chief economist Muhammet Mercan warned.

Some analysts suspected that Erkan and Simsek feared a negative reaction from Erdogan should they push their reforms too strongly.

Erdogan fired one central banker four months into his attempts to raise interest rates in late 2020 and early 2021. He had previously dismissed two others for challenging his approach.

Source: Al Jazeera

The post Turkey Makes Bigger Than Expected Interest Rate Hike, Targets Inflation appeared first on Ankara Haftalik.