Turkey’s end-year inflation expectations reach 13.88% in July

Turkey’s end-year inflation expectations reach 13.88% in July
By bne IntelliNews July 19, 2018

Expectations for Turkey's end-2018 inflation rate rose from 12.28% in June to 13.88% 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% to 18.39% at the next monetary meeting to be held on July 24.

Capital Economics had already pencilled 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% 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 - 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%. The regulator lifted its CPI inflation forecast for 2018 to 8.4% in its latest inflation report from the previous estimate of 7.9% given in the January inflation report. The increase was confirmed by central bank governor Murat Cetinkaya on April 30.

Turkey’s annual consumer price inflation jumped from 12.15% in May to 15.39% 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 substantially surprised markets by announcing a 125-basis point (bp) hike in its main policy rate to 17.75%, 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 Turkey’s overheating economy, 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% in 2018.

Central bank survey respondents also said that they expected the USD-TRY rate to be 4.8328 at the end of this year, a significant weakening from the 4.5837 anticipated in the June survey.

Moreover, they forecast that GDP growth would be 4.2% this year; that represented no change compared to the June survey.

Turkey’s GDP growth is expected to ease to 4.1% this year from last year’s breakneck pace of 7.4%, according to a Reuters poll of economists published on July 16.

In its World Economic Outlook Update, published this week, the IMF predicted Turkish growth will soften to 4.2 % this year.

According to the central bank survey, Turkey’s end-2018 current account deficit expectations rose to $54.8bn in June from $53.5bn in May.

Turkey’s current account deficit rose by 59% y/y to $27.7bn in January-May, the central bank announced on July 11.

The 12-month cumulative current account deficit reached $57.6bn in May, up from $57.1bn in April and $36.3bn in May 2017

Capital Economics forecasts Turkey’s GDP growth will fall to 3.5% in 2018 from 7.4% in 2017 as inflation quickens to 13.5% from 11.1% in 2017. It also forecasts Turkish central bank’s policy rate will end 2018 at 18.75%, 100bp higher than the current 17.75%.

Capital Economics’ end-2018 TRY/USD rate forecast stands at 4.80.