Turkey’s central bank on November 8 hiked its end-2024 official inflation "target" to 44% y/y from 38% y/y in its latest quarterly inflation report. The previous target was stated in August.

The upper boundary of the end-of-year forecast range was also moved up. It was pushed out to 46% y/y from 42% y/y.

Under usual circumstances, the central bank releases "forecasts", rather than “targets”, in its inflation reports. The annual inflation target has in fact long stood at 5% y/y.

However, in press conferences held since August last year, officials at the regulator have taken to suggesting that they actually treat their “forecasts” as their "targets".

Currently, the central bank thus targets end-2025 official inflation of 21% y/y with the upper boundary standing at 26% y/y.
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Chart: The central bank's forecast range.

On February 6, the central bank will release its next inflation report and updated forecasts.

42% in January

During a press conference, central bank governor Fatih Karahan said that the central bank sees official annual inflation at 42% (the upper boundary of the previous end-2024 target) in January and at 38% (the previous target) in March.

Above 1.5% m/m in November and December

The central bank also expects that unadjusted monthly inflation for November and December will be released at a point a little bit above the 1.5%-level while the seasonally-adjusted figures will come out at levels around the 2.3%s or a little bit above 2%.

The seasonally-adjusted monthly inflation figures will edge up a little in 1Q25 (due to wage hikes and new year price/fee updates). They will, meanwhile, fall below the 1.5%-level starting from 3Q25 and end the year in and around the 1.3%s (closer to the 1%-level).

Issued inflation reports previously reiterated that average "seasonally-adjusted" official monthly inflation would decline to 2.5% in 3Q24 (realisation: 3.02%, updated from 3.06%) and to below 1.5% in 4Q24 (2.51% in October).

49% in October

On November 4, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 48.6% y/y in October versus 49.4% y/y in September (chart).

TUIK’s inflation series has quickly fallen back to the 40%s thanks to the base effect after peaking at 75.45% in May.

TUIK also posted unadjusted monthly official inflation of 2.88% for October after releasing 2.97% for September.

The seasonally-adjusted monthly inflation for October was also released at 2.51% while the September figure was revised down to 2.73% from the 2.80% that was released a month previously.

In the coming months, TUIK is set to deliver further outcomes in the 1-2%s for the official monthly headline indicator.

The central bank also tracks inflation expectations via its monthly "Sectoral Inflation Expectations" and "Survey of Market Participants" releases.

Rate cuts in 1Q25

In October, the monetary policy committee (MPC) of Turkey’s central bank kept its policy rate unchanged at 50% for the seventh straight month in line with market expectations.

The next MPC meeting is scheduled for November 21. The rate-setters at this point look poised to again stick with the 50% benchmark.

In the current circumstances, expectations regarding the beginning of the easing cycle have been delayed from 4Q24 to 1Q25.

Output gap turned negative in Q4

In 4Q24, the output gap will turn negative (official GDP growth releases will fall below the long-term average growth releases referred to as potential growth) and monetary policy will remain tight even during the rate-cutting period, according to Karahan.

On November 29, TUIK will release its official GDP data for 3Q24. Figures that declare a technical recession has taken hold are on the cards.

"No commenting" but commenting on wage hike

Governor Karahan’s deputies Cevdet Akcay and Hatice Karahan (no relation) accompanied him once more during the latest Q&A session.

The trio remarked that they are not present on the minimum wage commission (implying they have no role that invites them to give input), while at the same time calling for the wage hike to be delivered in line with the inflation target (currently standing at 21-26% at end-2025) rather than the inflation realisation (currently expected at 44-46% at end-2024).

Self-contradiction is rife in the Erdogan administration.

According to S&P Global Ratings, a 30% minimum wage hike should be delivered. The bargaining will take place in December.

Since 2022, Turkey has been in a price-wage spiral. The new economic “orthodoxy” greenlit by President Recep Tayyip Erdogan means that the bill for breaking out of the spiral must be delivered to wage earners.

The minimum wage rose to Turkish lira (TRY) 17,002 in January 2024 from TRY 2,826 at end-2021.

Erdogan Suzer, a Sozcu daily correspondent, asked the governor whether the central bank has advised the government to index the revaluation rate for tax and hikes in fines to the inflation target rather than the inflation realisations, in the way that the regulator wants to see applied to minimum wage hikes.

The governor appeared to forget to address the issue during his reply to the question.

Many things can in fact be said about this issue, ranging from the “biblical” levels seen in the deviations present in the Erdogan regime’s targets/forecasts to the reliability of TUIK’s data and macroeconomic theories written for large open economies.

However, where no feeling of shame exists, thinking that words have consequences is a nonsense.

Tweet: "Realisation for me, my target for you." 

November 7 cut from Fed

Looking at the global markets, the Federal Reserve (Fed) delivered another 25bp rate cut on November 7. Since September, it has cut the upper limit of its federal funds target range to 4.75% from 5.50%. Its next rate setting meeting is to be held on January 29.

The European Central Bank (ECB) has, meanwhile, delivered three rate cuts that brought its deposit facility rate to 3.25% in October from 4.00% in June. On December 12, it will hold its next rate-setting meeting.

Turkey’s CDS remain below the 300-level, while the yield on the Turkish government’s 10-year eurobonds is hovering around the 7%-level.

A smooth turbulence due to seasonal fluctuations prior to the beginning of the new year rally along with the presidential elections in the US is still in play.

With the beginning of the new year rally, the easing atmosphere will be more strongly felt.

The orange guy is back

It will be a colourful four years with Donald Trump. We can hope they will be less bloody compared to the past four years. Both bloodier and less bloody are possible. He can either end or blow on the hot coals of the fighting in the ongoing wars in Ukraine and around Israel.

When it comes to the economy, this president will definitely be inflationary. He will push the Fed to cut rates more extensively and pump in more liquidity. Under normal conditions, this would mean a weaker dollar and lower borrowing costs.

It sounds like good news for Turkey. However, Trump runs hot and cold. He could decide to slap the face of Erdogan with a tweet at any given moment.

So, perhaps, it is best to remain cautious when it comes to the orange man.

Lira outperforms peers :))

Since end-August, the Erdogan regime has turned to its straight-line policy in the USD/TRY rate. The pair is currently drawing a line around the 34-level.

Adding a pinch of comedy value, Turkey’s lira was the only emerging market currency not hit by Trump’s election win. According to Bloomberg, Turkey’s government-run banks sold $500mn on November 6 when Trump claimed his victory.

As things stand, the regime's smooth nominal devaluation and real lira appreciation policy remain on track.

With September, carry trade inflows and eurobond sales resumed. The regime exploited the window for renewed inflows prior to the November stress.

Carry trade flows to Turkey (estimated)
million USD	Turkish Banks Off-Balance Sheet FX Position	Turkish Central Bank's Total Swap Stock with Local Banks	Swaps Converted to Deposits	Lira-settled FX Frowards	Turkish Central Bank's Net FX Derivatives Stock with Local Banks	Turkish Banks' Swap Stock with Foreign Counterparts (estimate)	Carry Trade Flows (estimate)	Cumulative Flow
Mar 29, 2024	55,781	57,898	433	4,279	61,744	-5,963
Apr 26, 2024	43,446	39,586	363	3,384	42,607	839	6,803	6,803
May 31, 2024	35,224	20,811	243	592	21,160	14,064	13,224	20,027
Jun 28, 2024	21,134	4,719	0	0	4,719	16,415	2,352	22,378
Jul 26, 2024	18,656	55	0	0	55	18,601	2,186	24,564
Aug 29, 2024	17,337	0	0	0	0	17,337	-1,264	23,300
Sep 27, 2024	22,566	-1,095	0	0	-1,095	23,661	6,324	29,624
Oct 25, 2024	21,134	-4,570	0	0	-4,570	25,704	2,043	31,667
Nov 1, 2024	18,018	-6,913	0	0	-6,913	24,931	-773	30,894
Nov 8, 2024		-6,808

Table: Turkey welcomed November with $773mn of carry outflows in the week ending November 1. It is supposed to turn positive with the US elections behind us.

Looking ahead to the new year rally, the $13bn seen in May could be too big of an expectation, but the $6bns seen in April and September could be surpassed.

Fake inflows

Faking it, so critics will tell you, is the “lifestyle” when it comes to the Erdogan administration. In July, Bloomberg reported that Turkish banks’ foreign branches were behind the latest inflows into the Turkish government’s lira bonds.

Turkey’s central bank provides a breakdown of data for eurobonds that shows how much is purchased by these branches.

However, such a breakdown is not available for the government’s lira papers. So, to what extent the Turkish banks are responsible for recent inflows in this case remains unknown.

According to Bloomberg, the cost of the lira abroad fell to levels 20 percentage points lower than the cost of the lira in Turkey, which stood at above the 50%-level in line with the central bank’s policy rate, since foreigners bought lira but could not swap them with Turkish banks due to limits placed on Turkish banks’ derivative transactions with foreign counterparts.

With the aim of benefiting from cheaper lira costs abroad, Turkish banks have borrowed lira abroad, bought domestic government papers with their lira and then sold or lent their lira papers to foreign counterparts via forward contracts, some unnamed traders told Bloomberg.

“Most of the inflows come to very short-term products amid brokered deals by foreign branches of Turkish banks,” Onur Ilgen, head of the treasury department at the Turkey unit of Mitsubishi UFJ Financial Group (MUFG Bank/Tokyo/8306), told the news agency.

Foreigners “tend to go for the highest-yielding notes with the shortest possible duration, so the quality of the inflows doesn’t appear to be very high for the time being,” Tufan Comert, an EM strategist at the London branch of BBVA (Madrid/BBVA), was cited as saying.

According to the news service, foreigners are cautious towards Turkey’s lira bonds. They prefer currency trades via forward contracts (carry trade) or shorter-term debt.

On November 7, Bloomberg quoted some unnamed people as saying that the Erdogan regime was investigating repo-like transactions by Turkish banks that let them access cheaper lira funding abroad.

The central bank has asked a few local banks for more information regarding the transactions, called “sell/buy-backs” and not classified as repo, in recent weeks.

A repo transaction has an interest rate while a sell/buy transaction has spot and forward security prices, according to Bloomberg. A sell/buy transaction is also not subject to withholding taxes or reserve requirements.

Some of the banks that were questioned by the central bank have stopped such transactions, the news agency also reported.

A spokesperson for the central bank was reported as saying that these transactions have been on the administration’s radar in recent months and were routinely audited.

In October, Morgan Stanley estimated the overall sum of the sell/buy transactions at between $9bn and $12bn.

As a result, the yields on Turkey’s government bonds have been rising rather than falling despite the inflows on paper.

On November 8, during the Q&A session, central bank governor Karahan said that Bloomberg’s figures were wrong.

The volume of the sell/buy transactions stood at $1.5bn and reached $2.1bn at a maximum, according to Karahan.
 

Weekly net inflows to Turkey's lira papers
million USD	Government papers	Cumulative since end-March	Stocks		Total cumulative
April	843	843	225	225	1,068
May	6,597	7,440	-394	-169	7,271
June	688	8,128	-1,368	-1,537	6,591
July	2,974	11,102	94	-1,443	9,659
Aug	916	12,018	-744	-2,187	9,831
Sep	1,922	13,940	-69	-2,256	11,684
Oct	234	14,174	-708	-2,964	11,210
Nov 1, 2024	622	14,796	111	-2,853	11,943

Table: Net inflows to Turkey’s government bonds stood at $14.8bn. The central bank governor essentially said that $1.5bn of this sum was fake.

Reserve accumulation on track

Since end-March, the central bank’s net FX position has improved by $111bn while the local banking system’s FX loans rose by $29bn and FX deposits declined by $17bn in addition to the $31bn of carry trade inflows and $12bn of inflows to equities and domestic government papers.
 

Turkish central bank's net FX position
	A.1_FOREIGN ASSETS (Thousand TRY)	P.1_TOTAL FOREIGN LIABILITIES (Thousand TRY)	Net (A.1-P.1)	USD/TRY Buying	Net USDmn	2. Aggregate short and long positions in forwards and futures in foreign currencies	3. Other (specify)	Net (minus) swaps	Cumulative change (USD bn)
Mar 29, 2024	4,057,007,074	3,834,312,295	222,694,779	32.26	6,903	-76,653	-4,338	-74,088
May 30, 2024	4,675,489,675	3,476,230,575	1,199,259,100	32.25	37,188	-39,291	-4,680	-6,783	67
Jun 28, 2024	4,762,091,401	3,700,003,784	1,062,087,617	32.83	32,355	-24,565	-3,264	4,526	79
Jul 31, 2024	4,967,794,204	3,565,009,078	1,402,785,126	33.08	42,401	-23,112	0	19,289	93
Aug 29, 2024	5,142,259,219	3,967,022,626	1,175,236,593	33.92	34,644	-22,339	0	12,305	86
Sep 30, 2024	5,276,985,424	3,690,124,446	1,586,860,978	34.12	46,507	-21,247	0	25,260	99
Nov 1, 2024	5,526,358,223	3,728,235,499	1,798,122,724	34.22	52,540	-15,612	117	37,045	111
Nov 7, 2024	5,372,462,982	3,765,279,506	1,607,183,476	34.18	47,026

Table: Turkish central bank’s net FX position.
 

FX loans and deposits at Turkish banks
USDmn	FX loans	Change	Cumulative change	FX deposits	Change	Cumulative
Mar 29, 2024	134,675			210,403
Apr 26, 2024	140,714	6,039	6,039	205,381	-5,022	-5,022
May 31, 2024	150,233	9,519	15,558	192,793	-12,588	-17,610
Jun 28, 2024	151,399	1,166	16,724	188,742	-4,051	-21,661
Jul 26, 2024	155,315	3,916	20,640	190,908	2,166	-19,495
Aug 29, 2024	160,509	5,194	25,834	198,245	7,337	-12,158
Sep 27, 2024	163,592	3,083	28,917	197,871	-374	-12,532
Oct 25, 2024	163,226	-366	28,550	194,099	-3,772	-16,304
Nov 1, 2024	163,823	597	29,148	193,869	-230	-16,534
Nov 5, 2024	164,683	860	30,008	193,223	-646	-17,180

Table: FX loans and deposits at Turkish banks.