AlwaysFree: Türkiye's Inflation to Fall Further in Absence of Major Lira Volatility

According to Daily Sabah article published on May 18, 2023, Türkiye's inflation is expected to fall further toward year-end without major volatility or a significant depreciation in the Turkish lira, according to a senior European development bank official.

Consumer price increases in Türkiye have moderated over the last six months from a 24-year peak in October last year, a trend the government says is expected to continue.

The inflation eased to an annual 43.68% in April, almost halving from 85.51% in October. It fell in December and touched 50.51% by March, with a favorable base effect and a relatively stable lira.

"Provided that there is no major shock or excessive depreciation of the Turkish lira, I expect inflation in the country to fall slightly by the end of the year," Roger Kelly, a regional chief economist at the European Reconstruction and Development Bank (EBRD), told an interview with Anadolu Agency (AA).

Kelly noted that they do not officially make forecasts about the inflation rates of countries, yet suggested that they expect the annual consumer price index (CPI) in Türkiye to be around 35% by the end of this year.

He said the upcoming trend would largely depend on the policies to be followed after the May 28 presidential runoff that will see President Recep Tayyip Erdoğan again face opposition rival Kemal Kılıçdaroğlu.

In last Sunday's presidential race, Erdoğan secured just under the 50% threshold needed to win outright and giving him the lead over Kılıçdaroğlu.

Erdoğan has repeatedly said his government would not reverse the course of its economic policies and would keep favoring lower interest rates if they win the election.

The government has favored lower borrowing costs as part of its economic program unveiled in 2021 to boost exports, production and investment and create new jobs. It eventually aims to lower inflation by flipping the country's chronic current account deficit to a surplus.

Erdoğan has insisted that high borrowing costs cause high inflation, rejecting economic thinking that suggests raising interest rates helps curb price increases.

An easing trend last year saw the Central Bank of the Republic of Türkiye (CBRT) cut its key one-week repo rate by 500 basis points to counter an economic slowdown before it held it at 9% in December and January. It justified the cuts by saying financial conditions must remain supportive of maintaining the growth in industrial production.

The bank further cut the benchmark policy rate by 50 basis points to 8.5% after the catastrophic Feb. 6 earthquakes to support the recovery of the real sector. However, it said last month that the recovery in the devastated southeastern region has been stronger than expected. As a result, it left the key policy unchanged in March and April.

Kelly's cited EBRD's 0.5-percentage-point downgrade in its forecast for Türkiye's economic growth this year, mainly due to the February earthquakes that ripped through the country's southeastern region.

The bank on Tuesday said it predicts Türkiye's gross domestic product (GDP) to expand 2.5% this year, down from its prior guidance of 3%, citing the impact of loose monetary policy alongside high inflation and Feb. 6 earthquakes.

The death toll of Türkiye's worst disaster of modern times stands at more than 50,000. Official estimates put the damage inflicted by the tremors at more than $100 billion, the EBRD said.

Kelly said the rebuilding activities would lift the growth next year. As a result, the bank sees Türkiye's economic growth at 3% in 2023.

"New buildings built according to the latest technical standards will provide much better earthquake resistance. This will lead to fewer losses in the event of a possible natural disaster in the future," Kelly noted.

Resilient banking sector

Among others, Kelly also stressed the Turkish banking sector's resistance to challenges in the global economy, as he noted that Türkiye's external financial obligations represented the main source of concern.

"The Turkish banking sector is quite resistant to changes in global financial conditions," he said.

"Turkish banks have significantly reduced their external borrowing levels since the Turkish lira crisis in 2018. As a result, they are in much better condition than before," he added.

"As of the end of last year, the external debts of the banks amounted to about $60 billion. This volume stood at about $100 billion in 2017."

Kelly said external borrowing levels of Turkish banks were extremely close to their counterparts in developing countries. He noted that Turkish banks' net foreign asset positions have improved significantly, and the loan/deposit ratio has reached its lowest level in the last 10 years.

"Banks are less sensitive to possible sharp falls in the Turkish lira and strict external financing conditions due to the reduction of their external financial liabilities," he said.

"In addition, the liquidity buffers of Turkish banks are also in better shape. For the first time in the last 10 years, banks' foreign currency liquidity is above short-term external debts."

Kelly again stressed the importance of economic policies that will be implemented in the coming period.

"I think the risks should not be underestimated. I think that the possibility of Türkiye facing a lira crisis can always occur if the wrong policies are adopted. This could cause a crisis in the country and the banking system," he warned.

However, Kelly said most analysts agree that with the right policy environment, the Turkish economy has the potential to outperform its peers in the emerging market.

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