Turkish “Middle”: The decline in inflation is slower than expected

Governor of Turkey’s Central Bank Shihab Kafji Oglu yesterday (Thursday) maintained the inflation forecast for 2023 at 22.3 percent, although inflation has eased to less than half a percent of market expectations. At a lower rate than the bank expected.
Unusual interest rate cuts implemented by President Recep Tayyip Erdogan triggered a currency crisis in late 2021, bringing inflation to a 24-year high of 85.51 percent last year. Since then inflation has declined; The lira has been relatively stable, hitting 43.68 percent last April.
Qafji Oglu said that the decline in inflation is proceeding at a slower pace than previously, indicators confirm a significant slowdown in price increases, cost pressures on inflation have mostly disappeared. His view that inflation will continue to ease throughout the year is at odds with market expectations.
Responding to a question about the gap between expectations, Qafji Oglu said the current gap in market expectations will narrow in favor of the central bank’s expectations. The average estimate in a recent Reuters poll of annual inflation in Turkey at the end of 2023 was 46.5 percent, with inflation expected to pick up in the second half of the year. Some economists believe that inflation touched a record low in April this year.
In statements issued in Ankara during the “Central Bank” report on inflation, Qafji Oglu confirmed that inflation will decrease against the background of current account surplus and that the “Central Bank” will continue policies supporting this result.
Meanwhile, Goldman Sachs yesterday (Thursday) said it was “cautious” about Turkish banks ahead of elections on May 14, as banking stocks are more vulnerable than others to the impact of a possible rise in interest rates. Following the vote, after years of pursuing unconventional monetary policy.
Polls show President Recep Tayyip Erdogan facing election defeat, largely due to a cost-of-living crisis that saw inflation rise to more than 85 percent under ultra-loose monetary policy last year.
Turkish banks have benefited from high interest rates for years, but that relationship collapsed when the government introduced new rules last November that effectively forced them to lend at lower rates, Goldman Sachs said in a note to clients.
After the Wall Street-listed bank shifted to short-term lending, lenders remained resilient, despite banks increasing the impact of rising interest rates. “In our view, banks will most likely suffer if the opposition wins,” wrote Goldman Sachs’ Jolene Chung.
On the other hand, a senior Turkish official said yesterday (Thursday) that the state-owned Zirat Bank could mediate payment transactions for Russian grain exports, and that the US and the United Nations would have to approve each move.
The official said that Zirat Bank will not be involved until all parties sign the agreement, adding that negotiations are underway on Russian grain exports. “(Jirath Bank) will be an intermediary in business transactions with the written consent and authorization of (JP Morgan) from the United States and the United Nations,” the official told Reuters. This will not be achieved without written approval, Zirat declined to comment on whether the bank could mediate payments for Russian fertilizer exports. The Deputy Defense Ministers of Russia, Ukraine and Turkey are to meet in Istanbul today (Friday) to discuss an agreement to export Ukrainian grain through the Black Sea.
Turkish Foreign Minister Mevlut Cavusoglu said last week that Zirat Bank could mediate the payment.