(Bloomberg) — Turkey hopes it’s close to turning the page on another crisis as inflation tops out.
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A long stretch of annual price increases is a legacy of ultra-loose monetary policy, fiscal largess and chronic instability in the lira. Before a likely turnaround begins, inflation approached 75% in May, according to the median estimate of economists surveyed by Bloomberg, from just under 70% a month earlier.
The trajectory of prices with a peak in May follows the path mapped out by the central bank as it embraced more conventional economics since President Recep Tayyip Erdogan’s reelection a year ago. The question now is whether inflation will also hew closely to forecasts on the way down and prepare the ground for interest rates to fall after an aggressive cycle of monetary tightening.
Policymakers anticipate Turkey’s inflation will end the year at 38%, which would still leave it as the world’s sixth-fastest, according to the International Monetary Fund. Bloomberg Economics expects annual inflation to fall by 10 percentage points each in July and August.
“While not impossible, 38% is quite ambitious,” said Daglar Ozkan, economist at Is Investment, whose own forecast is six percentage points higher.
The central bank says a significant deviation from the projected outlook and expectations could prompt another rate hike, after a cumulative tightening of over 40 percentage points in less than a year brought its benchmark to 50% in March.
Official borrowing costs have been kept on pause at the last two meetings, though policymakers introduced measures to restrain loan growth and remove excess liquidity from the market to ensure financial conditions stay restrictive.
What Bloomberg Economics Says…
“Our baseline view sees the central bank maintaining its policy rate at 50% through the third quarter of this year, with any threats to the inflation path managed by the tightening of its alternative tools. We expect the central bank to start trimming rates in the fourth quarter.”
— Selva Bahar Baziki, economist. Click here to read more.
Monthly price growth, the central bank’s preferred gauge, likely barely changed from April and reached close to 3% in May, another survey of economists showed. The central bank expected to see “a relatively flat course in the underlying trend of inflation” last month but warned that energy would have a “marked impact,” according to the minutes of its most recent rate meeting.
Under a pre-election promise made by Erdogan, Turkish households received a limited volume of free natural gas for a year, a giveaway that expired last month and will likely contribute to a higher inflation reading.
Looking ahead, fiscal adjustments planned by the government to complement the monetary tightening will increasingly be a major factor determining the course of inflation in the coming months.
Skipping an interim wage hike in July should be a “necessary component” to keep a slowdown on track, said Ozkan. “Further fiscal tightening through public spending cuts would help the central bank’s burden.”
The disinflation momentum will also dictate investor demand for Turkish assets, after a recent surge in foreign inflows.
Greater fiscal discipline and a continuation of tight monetary policy should increase interest in local government bonds once there’s “further improvement in inflation expectations,” according to Tufan Comert, director of global markets strategy at BBVA in London.
–With assistance from Joel Rinneby.
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