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Ayşe Özden

Senior Economist and Head of Economic Research, A&T Bank, Türkiye


 



Inflation: The Last Pop in Inflation for Türkiye


Global economy had a difficult and unprecedented 5 years since the beginning of 2019, mainly due to the impact of the pandemic, the Russia-Ukraine war, global trade wars, rapidly increasing inflation in both advanced and developing economies within the same calendar year along with implementing new monetary policies. Especially 2022 and 2023 will be remembered by overcoming high inflation along with Central Banks on stage.


Global inflation especially in the G20 has remained persistently pretty above the target trends and expectations. The universal law is clear for this; if the demand for something increases while the supply is limited; its price will undoubtedly rise. In response, the major central banks around the world led by FED increase the rates to prevent rising inflation despite recession concerns. Inflation peaked in both advanced and developing economies in 2022 and started to decrease in 2023 and eventually enabled the major Central Banks to end the pace of rate hikes. The surprise of last year was how fast inflation decreased. For example, in 2023 the US inflation decreased from 6.4% to 3.4% whereas inflation in the Euro area declined from 8.6% to 2.9%. Now risks have shifted from increasing inflation to slowdown in economic activity, so I expect the global economic slowdown will be mild and short-lived in 2024.  


Türkiye’s story is different from the world in recent years. We want our life to be simple, but then we do our best to complicate it. If I rewind a little bit; in 2022 and early 2023, in an environment of expansionary monetary policies and additional expansionary fiscal policies along with cutting policy rate to historic lows (unlike the rest of the world); as a result, we had experienced the highest level of headline inflation since June 1998, peaking at 85%, which had an impact on exchange rates, credit expansion and inflation expectations. 

On the flip side; don’t underestimate Türkiye’s resilience… Despite concerns about a slowdown in global economic activity, the Türkiye’s economy was the fastest growing economy among the G20 countries, delivering a very strong growth performance of 5.6% in 2022 and 4.5% in 2023.


Inflation is the soft underbelly of the economy. There are two main driving forces behind the rise in inflation in Türkiye; firstly, food & commodity prices and secondly exchange rates. By the way, I have nothing to say about the global increase in food prices and commodity shocks that helped create high inflation at a 40-year-high level from US to Eurozone economies along with sharp rate hikes.  As it is well known, exchange rate and inflation are like two sides of the same coin. The exchange rate measures the purchasing power of money abroad, while the headline inflation measures the purchasing power at home. Therefore, we are not able to manage to lower inflation and inflation expectations also to prevent the exchange rate from depreciating at the same time. Either we should fight with still increasing inflation or we should prevent increasing demand of foreign currencies. Depreciation of TRY (Turkish Lira) is clearly on the frontline. 


What’s happening in Türkiye right now? There are two important title characters of the economy. Inflation and TRY.  After the 2023 general elections, the first half and the second half of the year are very different in terms of the market friendly appointments of new economic management and the direction of new monetary policy implemented which were definitely required to combat inflation. Since June 2023, the policy rate has been raised by 4.150 basis points from 8.5% to 50% on the back of the policies aimed at controlling inflation and at the same time reducing TRY volatility and providing real value appreciation. The steps of increasing interest rates fortified the trust and confidence that ongoing monetary policy stance would be implemented decisively and that the disinflationary process would begin, while supporting appetite for TRY. For this reason, we will see the headline inflation start easing in July after peaking at 75% and then decreasing to 45% until the end of this year.


On the other hand, I expect a gradual increase in fund flows to emerging economies in the second half of the year as the central banks of developed countries begin their interest rate cut cycle. Since there will be no elections on our country’s agenda in the next 4 years, for 2025 and beyond I can say that we will move forward with our improved basic macro, the continuation of our growth performance with export and investment-friendly policies, which have financed with domestic demand for 2 years, low inflation environment, increasing capital inflows and sprouting investments in the medium term. 


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