Positive moves: Karahan in an interview at his office in Istanbul. Turkiye’s central bank left the benchmark interest rate at 50% for a fourth consecutive month in July and says domestic demand is finally starting to slow. — Bloomberg
ISTANBUL: Turkiye’s headline inflation likely saw the sharpest drop in nearly two years in July, a slowdown largely due to base effects that officials may overlook as they focus on more immediate risks to prices.
Annual price growth fell to 62% from 71.6% in June, according to the median forecast of economists canvassed in a Bloomberg survey.
Central bankers mainly focus on the month-to-month inflation rate, their preferred metric in shaping monetary policy, which is forecast to accelerate to 3.4%, from 1.6% in June.
A series of increases in the administered costs of items such as water and electricity will likely underpin price pressures, but on a temporary basis, according to the central bank’s Monetary Policy Committee.
Governor Fatih Karahan said in July that while he expects those higher costs to add 1.5 percentage point to monthly inflation, they won’t distort the overall outlook.
The central bank most recently forecast annual inflation at 38% at year-end, with Karahan due to present the fresh projections on Aug. 8.
The benchmark interest rate was left at 50% for a fourth consecutive month in July, and domestic demand has finally started to slow.
Still, the central bank said demand isn’t easing to the extent that was previously envisaged and price pressures in the services sector remain a risk.
Investors appear convinced that inflation is being tamed and the country is charting a path back to economic normalcy that will supercharge its markets.
Foreign ownership of Turkish stocks and bonds now stands at the highest level in five years, with Amundi SA, Abrdn Plc and Vanguard Asset Services Ltd among the firms that have been building up positions.
More than US$30bil has flowed into the country since May 2023, according to central bank data compiled by Bloomberg, although that includes some funds sent by Turkyish banks’ foreign counterparts.
“Turkiye’s annual inflation is set to tumble by about 10 percentage points in July, chiefly driven by base effects,” economist Selva Bahar Baziki said.
“That would mark the first of two significant moves lower we are expecting, with a similar plunge likely in August.
“The road beyond the summer will be stickier, though, making a decline to the central bank’s end of the year expectation unlikely.”
It remains a challenge to persuade households and businesses of the credibility of the projected inflation path, with their 12-month expectations significantly higher than those in the financial markets.
Deputy governor Cevdet Akcay warned that there would be negative repercussions for unemployment and output if they remained “unresponsive” to restrictive policy.
“To me, the necessary condition to anchor expectations is to establish central bank credibility,” said Selva Demiralp, a former US Federal Reserve economist, who now teaches at Istanbul-based Koc University. — Bloomberg
