Turkish central bank Governor Sahap Kavcioglu may offer clues on interest rates in unveiling his first quarterly inflation report of the year, though it’s unlikely his prior outlook for prices will change much as the country emerges from its worst cost-of-living crisis in two decades.
(Bloomberg) —
Turkish central bank Governor Sahap Kavcioglu may offer clues on interest rates in unveiling his first quarterly inflation report of the year, though it’s unlikely his prior outlook for prices will change much as the country emerges from its worst cost-of-living crisis in two decades.
A precipitous decline in price growth at the end of 2022 gives Kavcioglu an opportunity to spell out plans for the months ahead after the central bank began to lay the ground for deeper monetary easing last week.
An approaching election is adding urgency to declare victory over inflation, with President Recep Tayyip Erdogan saying it will continue its “rapid” deceleration and end this year at around 20%.
The governor already bent policy to Erdogan’s wishes in cutting rates and the question now is if Kavcioglu will also take a cue from the president when he presents the base-case scenario for consumer prices for the next two years on Thursday.
In its previous report last October, the central bank revised this year’s projection for inflation to 22.3% from 19.2%. For Turkey, as a net oil importer, additional risks ahead include the prospects for energy prices as China reopens its economy and bolsters demand for commodities.
Analysts are split on how the central bank might shift its forecasts, with Bloomberg Economics anticipating it will announce a slightly higher rate in a range of 22%-25% but without ruling out the possibility of a downward revision.
The central bank’s monthly survey of market participants in January showed a decline in inflation expectations, with year-end price growth now seen at 32.46%.
What Bloomberg Economics Says…
“Expansionary fiscal and credit policies in the lead-up to the elections this year will add to inflationary pressures. A dry winter may also push food prices higher later in 2023. And the central bank’s own accommodative stance — with a chance of further policy rate cuts — will weaken the currency and boost price gains.”
— Selva Bahar Baziki, economist. Click here to read more.
Turkish inflation slowed sharply in December to an annual 64%, from as high as 85% in the previous months — thanks in part to the statistical effect of a high base in late 2021, when the lira lost nearly a third of its value in a month.
Treasury and Finance Minister Nureddin Nebati has argued, however, that the decline goes “beyond” the base effect.
TURKEY INSIGHT: Lira Interventions to Run Out of Steam in 2023
Economists at Goldman Sachs Group Inc., who predict inflation will reach close to 30% by mid-year, said in a report that “although in a standard framework this would not lead to a rate cut, the Turkish central bank could see this as supportive of lower rates.”
Breaking Rules
Turkey has been defying economic convention by avoiding rate hikes and relying on alternative tools including foreign-exchange interventions and policies that promote the wider use of the lira.
The Turkish currency is down less than 1% against the dollar so far this year after losing close to 30% of its value in 2022. It still offers deeply negative real yields after Kavcioglu cut the key rate by 500 basis points to 9% last year.
A more stable lira, alongside falling energy prices, is keeping inflation in check, according to Hakan Kara, former chief economist at the Turkish central bank.
But measures including an increase in the minimum wage are driving up demand and tempering the slowdown in inflation, said Kara, who’s now professor of economics at Bilkent University in Ankara.
“In this context, taking into account upward and downward factors, I would not expect the central bank to significantly revise its forecasts,” he said.
(Updates with economist comment in 10th paragraph)
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