Turkey’s central bank (CBRT) has re-embraced orthodox monetary policy this year, increasing its policy rate from 8.5% in May to 40% in November. At its last meeting the CBRT signalled that it is nearing the end of the hiking cycle. We think it will hike the policy rate in two stages to 45% next month and then keep it stable until July before starting to cut.
We target 35% CPI at year-end 2024. We expect annual inflation to fall sharply in the second half of 2024 and target 35% CPI inflation by year end. We therefore think the policy rate will decline to 30% by the end of 2024 while keeping ex-ante real policy rates above their historical averages.
We also welcome the CBRT’s efforts to deregulate the banking sector and support an efficient functioning of the monetary transmission mechanism. Both monetary tightening and a deregulated banking sector will persuade deposit-holders to save in local currency and thereby reduce inflation, we argue.
This note set outs our rationale for these forecasts and our views on Turkey’s economy for 2024.
Our optimism about 2024 disinflation is threefold.
i) Real TRY appreciation; ii) A decline in currency volatility; and iii) Weakening credit impulse. The first two factors will help reduce cost pressures and the third will weaken domestic demand. The bear steepening of the yield curve and front-loaded CBRT rate hikes suggest these factors will help disinflation in 2024.
Current account improvement will help real TRY to appreciate
A lower current account deficit in 2024 due to fewer gold imports and weak domestic demand supported by mediocre loan growth will help ease TRY exchange rate pressure. We forecast the current account deficit will fall from 4.3% of GDP (USD43.5bn) in 2023 to 2.7% of GDP (USD30.5bn) in 2024. Given a historical average deficit of 4% of GDP, this could be considered a significant improvement in current account dynamics.
Such a moderate current account deficit could be financed comfortably, we argue.
Excerpt from the same titled report
Follow our English language YouTube videos @ REAL TURKEY: https://www.youtube.com/channel/UCKpFJB4GFiNkhmpVZQ_d9Rg
And content at Twitter: @AtillaEng
Facebook: Real Turkey Channel: https://www.facebook.com/realturkeychannel/
