Türkiye touts fall in long-term inflation views despite year-end uptick
Inflation expectations in Türkiye for the end of the year ticked up for the first time in five months, a closely watched survey showed on Friday, while they maintained a downward trend for the next 12 and 24 months.
Inflation is expected to end 2024 at 43.31%, according to the August market participants survey by the Central Bank of the Republic of Türkiye (CBRT), up from the 42.95% estimate in July.
However, longer-term expectations showed some improvement.
The 12-month inflation forecast dropped from 30.02% to 28.71%, and the 24-month expectation also decreased slightly from 19.32% to 19.30%, according to the survey.
Annual inflation fell to 61.78% in July and is seen declining further with the impact of tight policy and a slowdown in domestic demand to stand at around 40% at the end of this year, according to multiple market surveys.
Treasury and Finance Minister Mehmet Şimşek expressed optimism, noting that inflation expectations over a 12- and 24-month horizon have been improving for the past 10 months.
Şimşek attributed the limited increase in the year-end inflation expectations to temporary factors in July.
“We anticipate that annual inflation will decline significantly in August and continue to fall throughout the remainder of the year,” the minister wrote on social media platform X.
Türkiye has been grappling with persistently high growth in price gains, a challenge exacerbated by global supply chain disruptions and fluctuating energy prices.
The central bank raised its policy rate by 500 basis points to 50% in March, citing deterioration in the inflation outlook. It has kept the benchmark rate steady for four months since then, while vowing to act if the inflation outlook worsens.
In total, the bank has raised its policy rate by 4,150 basis points in a tightening cycle since June last year, as authorities reversed a previous low-rates policy.
Rate cuts, current account deficit
Even though annual inflation started to decline, the CBRT is expected to leave its key interest rate unchanged at 50% at its Monetary Policy Committee (MPC) meeting next Tuesday, according to surveys.
With further falls in inflation expected, the central bank is expected to start cutting the policy rate later this year, according to economists. But any significant easing was not expected to come until next year.
Last week, during an inflation report presentation, CBRT Governor Fatih Karahan vowed to maintain a tight monetary policy stance, while maintaining end-2024 and end-2025 inflation forecasts at 38% and 14% respectively.
Karahan also said a tight monetary policy stance could be maintained even when the time comes for rate cuts.
Participants in the CBRT’s August survey expect the bank to start cutting rates in the coming months, seeing the benchmark one-week repo rate falling to 48.10% in three months, down from the previous forecast of 50%.
Over a 12-month period, the rate is expected to fall further to 33.30%, down from 34.57% in the July survey.
Participants expect the Turkish lira to end the year at 37.27 against the U.S. dollar, a slight improvement from the previous forecast of 37.36.
However, looking ahead, the 12-month exchange rate forecast rose from 41.51 per dollar to 42.03.
Türkiye’s economic growth forecast for 2024 remained unchanged at 3.4%. However, the projection for 2025 saw a slight downward revision, from 3.6% to 3.5%.
On the other hand, the current account deficit forecast improved.
The survey showed that participants expect the year-end deficit to narrow to $25.5 billion, down from a previous forecast of $27.6 billion. For 2025, the shortfall forecast reduced to $25.6 billion from $27.1 billion.
The monthly survey gathers input from 72 participants, including 54 from the financial sector and 18 from the real economy, to gauge expectations on key economic indicators.
