Key takeaways
- Macroeconomic imbalances are improving albeit slowly. We still see a soft landing in Türkiye rather than a sharp contraction.
- We revise our CA deficit forecast down from 2% to 1.7% and see slower growth next year at 2.8% (3.4% previously)
Türkiye in Focus: It is still a soft landing
Inflation will likely be below the policy rate of 50% in September. However, services inflation has not yet slowed down, and month-over-month inflation is not where the CBRT guides it to be. Still, we see room to cut in December. Although real sector feels the pain, data shows a soft landing rather than a hard landing. We don’t see a need for rush to big cuts given the slow adjustment and still high levels of inflation.
Inflation below the policy rate after a long time
Year-on-year (yoy) inflation was 52% in August, down from 61.8% in July. We expect it to continue to decrease but at a slower pace from here. We see it at 48% in September, the first-time headline inflation will be below the policy rate since 2021. Month-over-month (mom) inflation has been trending c. 2.8% on average (c. 3% seasonally adjusted) in last two months. August print was on the high side again due to c. 70bp contribution due to increase in natural gas prices.
Services remain high as rent inflation is hovering around 7% mom. Overall, mom change in services was 4.6% and even durables showed a slight uptick. CPI excluding administered and directed prices continued to slow down in August. However, sticky services inflation and still elevated food prices pose risk to CBRT target inflation of 38% at year-end. Medium Term Program inflation forecast was announced as 41.5% and we continue to see inflation at 42% this year and 25% next year. CBRT will likely revise its year-end forecast slightly higher in the November inflation report.
Demand slows down but no sign of hard landing in data yet
Bank loan growth has been subdued since March when macroprudential measures were introduced. Since then, consumer loan growth has been mostly stable at 30-35% and commercial loan growth in local currency is c. 12%, significantly below the inflation rate. Although there have been complaints over high rates and low FX from the real sector, data does not show a significant contraction in the economy yet and improvement in macroeconomic imbalances are clear but slow.
PMI data show more weakness in domestic orders vs. export orders, implying further correction in the current account deficit excluding gold and energy. However, compared to the adjustment in 2018, we are seeing a much slower pace. Import volume is significantly down while export volume remains steady implying that not all correction is due to import prices. In August, PMI for export orders were above 50 for the first time since June 2023 while overall index remained below the threshold showing contraction.
Hence, we don’t see a need by CBRT to rush into cutting rates. We still see a first cut (250bp) in December. A November cut is possible if data shows more improvement than we expect but would likely be much smaller in the 150-200bp range.
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