Turkish Inflation Expected to See a Huge Drop That Central Bank May Ignore BNN Bloomberg

(Bloomberg) — Headline inflation in Turkey likely fell by its biggest amount in nearly two years in July, a slowdown largely driven by base effects that officials may be overlooking as they focus on more immediate risks to prices.

Annual price growth fell to 62% from 71.6% in June, according to the median forecast of economists surveyed by Bloomberg. Central banks are mainly focused on the monthly inflation rate, their preferred gauge for shaping monetary policy, which is expected to accelerate to 3.4% from 1.6% in June. The data is due out at 10 a.m. local time on Monday.

A series of hikes in water and electricity costs are expected to add to price pressure, but only temporarily, according to the central bank’s Monetary Policy Committee. Governor Fatih Karahan told Bloomberg in July that while he expected the higher costs to add 1.5 percentage points to monthly inflation, they would not distort the overall outlook.

The central bank recently forecast annual inflation of 38% by the end of the year, and Karahan is due to present his new projections on August 8.

The key interest rate was held at 50% for the fourth consecutive month in July and domestic demand finally started to slow. However, the central bank said demand is not easing as much as it had expected and price pressures in the services sector remain a risk.

Investors appear convinced that inflation is under control and that the country is charting a path to a return to economic normality that will boost its markets.

Foreign ownership of Turkish stocks and bonds is now at a five-year high, with Amundi SA, Abrdn Plc and Vanguard Asset Services Ltd. among the firms adding to their positions. More than $30 billion has flowed into the country since May 2023, according to central bank data compiled by Bloomberg, though that includes some funds sent by Turkish banks to their foreign counterparts.

What Bloomberg Economics says…

Turkish annual inflation is expected to fall by around 10 percentage points in July, mainly due to base effects. This would mark the first of two significant declines we expect, with a similar fall likely in August. The road beyond the summer will be more difficult, however, making a cut from the central bank’s year-end expectations unlikely.

Selva Bahar Baziki, economist. Click here to learn more.

It remains difficult to convince households and businesses of the credibility of the projected inflation path, as their 12-month expectations are significantly higher than those reflected in financial markets. Deputy Governor Cevdet Akcay warned that insensitivity to restrictive policy could have negative repercussions on unemployment and output.

For me, the necessary condition for anchoring expectations is to establish the credibility of the central bank, said Selva Demiralp, a former U.S. Federal Reserve economist who now teaches at Koc University in Istanbul.

No one knows whether the current governors will be able to deliver on their promises or whether they will be abruptly dismissed at some point, Demiralp said. It is this doubt that keeps expectations unfounded, given recent experience, where five central bank governors have been replaced in five years.

Before last year’s national elections, President Recep Tayyip Erdogan regularly intervened in monetary policy to push rates lower. Although new central bank leaders have been appointed and those officials are widely respected by investors, there are still fears that history could repeat itself.

Erdogan has not commented on rates since the election, except for a cryptic message in June when he said inflation would slow further in the last quarter of this year as rates were cut.

As price pressures ease and tight monetary policy dampens economic activity, pressure could mount on the central bank to consider cutting rates.

Policymakers have repeatedly spoken out against cutting borrowing costs too early, but Goldman Sachs Group Inc. and JPMorgan Chase & Co. have indicated a reduction could be on the agenda as early as September or October.

It would be rather inappropriate for the central bank to consider a rate cut, which would cause a further deterioration in inflation expectations, Demiralp said.

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