Inflation, financial easing and growth concept

Turkey: Base effect process in inflation

-Base effect and other elements

-Liraization strategy and use of alternative instruments

-Slowing growth momentum

December CPI was well below the expectations and closed the year with 64.3%. Inflation slowed down relatively quickly due to the base effect from the exceptionally high realization of the previous year. Despite this, we still need to talk about a public expenditure increase that can feed periodic price increases before the election. Therefore, demand-creating effects that trigger periodic price increases such as wage increases and early retirement should be taken into account in the first few months of the year.

On the core inflation side, there has been an explainable decline as the exchange rate has held steady for the past few months. The base effect will also have an impact on special comprehensive indicators in the coming months. Since it is an inflation indicator that excludes fluctuations in oil and commodity prices, real sticky inflation, which reveals fundamental pricing behaviors, will emerge here, and we expect a resilient outlook here after the base effect wears off.

We would like to remind you that these decreases will be entirely due to the base effect and will not be the result of a policy resulting from the decrease in inflation. After the base effect on inflation wears off in the second half of the year, we think that different and normalized monetary policies will be necessary in the fight against inflation.

Annual inflation in Turkey… Source: Bloomberg, TURKSTAT, Tera Yatırım

The net minimum wage increase (55% w/v and 100% y/y) and the MPC meeting, in which the policy rate was kept constant at 9%, were events that took place in line with our expectations.

There is positive news on the energy front, with more natural gas reserves in the Black Sea, a natural gas price reduction for residential use in Istanbul, and a nationwide electricity price reduction for industrial use. We consider the reflections of these dynamics (price reductions in the near term, new discoveries in the structural sense) to be important in terms of inflation and current account balance.

The government has launched the long-awaited income-based housing loan campaign. People who will benefit from the housing campaign must not have sold a house in the last year in the province they want to buy a house. The purchased residences will not be sold for five years. The minimum down payment is 10% and the maximum maturity is 15 years. Government-supported TL 25 billion (USD 1.3 billion) loan will be given to contractors to build houses. The program is valid only for first-hand purchases and will be valid for all projects in completed, partially completed and new projects, provided that approval for housing finance is obtained and a guarantee agreement is signed between banks and developers.

The Central Bank held the MPC meeting, where it ended the rate cut process that started in August. The Bank noted that due to the increasing recession risks in financial markets, it has started to regulate its expectations that central banks will end their rate hike cycles in the near future. It is also stated that the entire policy toolkit of the Central Bank, especially the funding channels, will be aligned with the liraization targets.

The CBRT also published the 2023 monetary policy strategy report, which aims to further increase the long-term fixed-rate securities in banks’ balance sheets. Anka reiterated that the current strategies will continue in the same way, mainly with the aim of keeping the share of TL in deposits. For 2023, 60% will be given priority to TL deposits, excluding foreign exchange protection.

The discount rate for CPI indexed ones in the collateral system of the central bank’s open market operations (OMO) was increased from 60% to 70%. The move is part of a policy to increase the weight of government bonds in the OMO. In line with the CBRT’s strategy, this move aims to make CPI-linkers less attractive to banks, and to continue to increase the collateral requirements of longer-term fixed-rate TL securities and, accordingly, their share in bank balance sheets.

The Central Bank may take new measures to ensure the balance between TL loans and TL funding and between FX loans and FX funding.

In the charts, the collateral pool held by the banks at the CBRT is presented in three basic items. When the collateral baskets at the CBRT are analyzed, it is seen that the share of fixed coupon, discounted, floating coupon and TLREF indexed securities in the GDDS basket has increased significantly, while the CPI indexed GDBSs have decreased. Source: CBRT

 Emerging markets: High inflation and geopolitical risks

 -Combination of high inflation and aggressive tightening

-Approaching recession and growth supports

-Geopolitical developments and elections

The combination of inflation and aggressive central bank tightening is likely to continue to plague many of the largest economies in both the developed and developing world in 2023. Headline inflation will likely move on a downward trajectory in many countries, whereas core inflation risks becoming more persistent. Central banks still have work to do to contain the price increase, so the policies adopted to deal with the problems in 2022 will form the initial outlines of 2023 as well.

However, in the threat of global recession, it is very likely that some policy makers will turn to growth-oriented policies. Developing economies may also be adversely affected by this cycle due to contagion effects. Structurally, most of the developing economies depend on exports and external demand. With many of the world’s largest economies going into recession in 2023, spillover effects not only reach emerging economies, but multiple emerging economies could create their own recession cycle.

Geopolitical developments constituted the most important risk of financial markets in 2022. Such risks may still have an impact on the global economy and financial markets. Presidential elections to be held in Argentina and Turkey this year will also be decisive on local politics, economic policies and the concept of investment.

Advanced economies: No early financial easing

-Fed pivot expectations

-2023 monetary policy cycle

-Proactive firming

Many central banks, especially the Fed, aggressively tightened their monetary policy to combat inflation. In this scale, the transfer of monetary policy to indicators, especially inflation, has an important place in terms of the end of rate hike cycles for central banks. As expected at its December meeting, the Fed increased the policy rate by 50 basis points and brought the federal funding rate band to 4.25-4.5%. The Fed’s dot chart shows that the median 2023 forecast for the federal funds rate has risen to 5.1%. The forecast for the end of 2024 is 4.1%. Such a 2023 projected path not only placed the ceiling interest rate slightly above the expected threshold, but also probably sent the timing of the first rate cut beyond 2023 in terms of the duration of interest rates.

Fed’s December Dot Chart… Source: Federal Reserve, Bloomberg

At the last meeting, although Fed members’ interest rate forecasts rose, the prediction that interest rate cuts would start in 2024 came to the fore. However, there is a detail that should not be forgotten: Interest rate projections reveal that interest rates will remain at the level of tight monetary policy in the period covering 2025. The threshold level of this policy will of course depend on the severity of recession fears. . The Fed still shows the high trend in inflation in its tight monetary policy.

It is a pleasing detail that energy use has decreased with the mild season in Europe and the return of prices to pre-war levels. If regional economies, especially Germany, have a better-than-expected year, the ECB is more likely to focus on inflation. It is important to shift the balance between supply inflation and demand inflation. Because before that, a managed supply inflation dominated gasoline prices. Inflation stemming from wages and expectations is under the direct control of policy instruments. The current situation may make the ECB more proactive in raising interest rates.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı