Türkiye`s President Erdoğan named Mehmet Simsek as Treasury and Finance Minister in the new cabinet last weekend. Cevdet Yilmaz, known as supportive of orthodox economic policies, was appointed as Vice President. Treasury and Finance Minister Mehmet Simsek pointed out in his speech on Sunday that Türkiye has no choice but to return to rational policies, signaling tighter fiscal and monetary policies in line with our expectations.
Finance Minister Simsek emphasized strong commitment to price stability and fiscal discipline. Simsek stated that achieving single-digit inflation and structural transformation to reduce current account deficit in the medium-term will be the main agenda. The medium-term program will be prepared soon to present inflation, growth, current account, and budget targets as Simsek emphasized fiscal discipline in his speech. Due to election promises, earthquake relief and reconstruction, and the fiscal cost of the FX-protected lira deposit accounts, we expect a challenging road ahead in achieving fiscal discipline, but tax hikes and administrative price increases will likely be brought into play.
As part of the need to tighten monetary policy, we now see a rate hike in the next MPC meeting scheduled for 22 June, if not earlier. The first rate hike might be intended to close the gap between the policy rate and the average deposit rate.
While the average deposit rates reached 25.9%, the lira deposit rate with maturity of 1-3 months is at 33.9% as of 26 May). A policy rate hike to 25%, from the current level of 8.5%, is on the table for 22 June or earlier, along with forward guidance suggesting smaller rate hikes if needed. We maintain our year-end policy rate forecast at 30%.
Lending growth to slow sharply. We anticipate the removal of caps on loan rates by relaxing securities maintenance obligations for consumer and commercial loans to strengthen the monetary transmission and increase loan rates. At the same time, a combination of state banks reduced lending along with general tightening in credit conditions will slow lira credit growth in 2H23. Last but not least, the CBRT is likely to slow the government bond purchases in 2H23.
This report was published on 5 June
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