CBRT Market Participants Survey: May survey 12-month CPI forecast at 33.28%

In the CBRT May Market Participants Survey, the current year-end inflation expectation was 57.92%. When we look at the short-term inflation expectations; May inflation is expected to be 3.97%, June inflation to 2.97% and July inflation to 2.54%. If inflation increases in line with the expectations in the said months, annual inflation in May, June and July will be 75.16%, 76.93% and 78.21%, respectively.

The deterioration in inflation expectations still continues. With the recent developments, agricultural input inflation is increasing at full speed. In addition to factors such as drought and climate change, which adversely affected the previous supply conditions, the Russia-Ukraine war, which negatively affected grain trade on a global basis, and the consequent application of protective measures in terms of supply security by many countries do not indicate a very positive situation in terms of global food inflation. The effects of oil prices and the extremely loose economic and monetary policy in the country show that inflationary pressure will be felt heavily in the goods and services groups.

The high price effect will continue to be monitored due to reasons such as exchange rate, internal pricing factors, oil and commodity prices, demand-side movements caused by deteriorating inflation expectations, and central price adjustments. Instability and volatility in inflation also affect future expectations such as 12-24 months. On the long-term side, the 10% market median after 5 years is twice the 5% long-term target of the Central Bank. We expect inflation to be 62% at the end of the year, with the base effect that will take place in the last month, and to continue to hover around the 70% path throughout the year.

According to the average inflation forecasts for the next 12 and 24 months, inflation is expected to be 33.28% and 19.54%, respectively. Thus, the average of inflation expectations for the next 12 and 24 months became 26.41%.

Interest rate expectations in the Repo and Reverse Repo Market were 14% for the end of the month. The market foresees the one-week repo rate, which is the policy rate of the Central Bank, as 14, 14, 14 and 18.05% in the current month and 3, 12, and 24 months ahead expectations, respectively.

Despite the increase in current inflation expectations, market participants still expect no reverse in monetary policy in the short term. This shows that its negative real position will continue to remain in a rather deep position against inflation. Within the scope of the “liraization” strategy of the central bank, the issue of price stability was based on FX-linked deposit or other TRY-based financial products that could be issued rather than the interest rate instrument. Regarding the current account surplus, which is expected to operate in this strategy, it is seen that no help will come due to the new import-export balances. Since the exchange rate is around 16, the periodic interest rates have been exceeded. Despite challenging conditions, the Central bank does not signal a return to orthodox monetary policy and rate hikes. On the other hand, it is seen that market participants expect monetary policy tightening in the medium term. While we agree with this view, we do not expect any interest rate changes at the May 26 meeting.

We see a slight revision in growth expectations for this year. The 2022 GDP expectation has been increased to 3.3%. The forecast for 2023 was 4% growth in the May survey period. In terms of growth, we are relatively positive about first-period prospects. Leading indicators show that an economic growth in the 6-7% band will be announced in 1Q22. For the following quarters, some downside risk balances emerged on the relatively favorable economic activity. We underline factors such as increasing uncertainties in foreign demand and purchasing power eroded by inflation on the domestic demand side. We will observe the production and export effects of these external and domestic demand factors. We expect growth to decline to 3.7% this year.

Current account deficit expectations of market participants are revised upwards rapidly. In the current account balance, on which the liraization plan within the scope of price stability is largely based, there is no longer any expectation of a surplus. In terms of the current account balance, we are in a weaker position in terms of increasing import bill and decreasing export contribution. Tourism may balance the current situation a little in the coming months, but it will not be enough to close the gap. Factors such as the ongoing and desired economic growth path, the high level of energy costs likely to be preserved, and loose monetary and fiscal policies will increase the current account deficit. Due to these risk factors, we keep global geopolitical developments at a very decisive point and present a more pessimistic current account deficit expectation compared to market participants.

In the framework of the ongoing geopolitical developments in oil prices, the supply shortage causes marginal pricing, the tourism sector is negatively affected by geographical developments and tourism originating from Russia (it has an effect of approximately 4 billion dollars if the income from Russian tourists is zero), the global economic slowdown negatively affects the export potential, especially from the Euro Zone. We focus on factors such as; we evaluate that a current account deficit of 47 billion dollars may occur in general this year.

Exchange rate expectations for the end of 2022 were 17.57. We see that the exchange rate expectations for the next 12 months are 18.47. With the exchange rate already reaching the level of 16, we see that the periodic deposit interests on a 6-month basis have been exceeded. In view of the current inflation levels and negative real interest effects, the market’s views may contain a lot of variation, we think that we can see a higher depreciation effect on the TRY side towards the end of the year.

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