The monetary policy committee (MPC) of Turkey’s central bank on September 19 kept its policy rate unchanged at 50% for the sixth straight month in line with market expectations (chart).

While core goods inflation remained low despite a slight uptick, an improvement in services inflation can be expected to occur in the last quarter, the MPC noted.

The decisiveness shown with the tight monetary stance would bring down the underlying trend of monthly inflation through a moderation in domestic demand, a real appreciation in the Turkish lira and an improvement in inflation expectations, the authority reiterated.

The tight monetary policy would be maintained until a significant and sustained decline in the underlying trend of monthly inflation was observed and inflation expectations converged to the projected forecast inflation range, it also restated.

The central bank said it would also keep employing macroprudential measures and sterilisation tools.

Rate cuts in Q4

The next MPC meeting is scheduled for October 17. The rate-setters at this point look set to again stick with the 50% benchmark.

As things stand, a rate cut is expected in the fourth quarter.

In June 2023, following the post-election appointment of Turkey’s new economic team led by finance minister and ex-Wall Street banker Mehmet Simsek, the Erdogan regime U-turned on monetary policy and launched a tightening process that is ongoing.

The policy rate was hiked to 50% by March this year from the ultra-loose 8.5% that was in play in June last year.

Central bank tracking monthly inflation

On September 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 52% y/y in August versus 62% y/y in July.

TUIK also posted monthly official inflation of 2% for August. It released 3% m/m for July and 2% m/m for June, after releasing 3% m/m figures for the three previous months.

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

With reference to "inflation expectations", the MPC refers to the central bank’s monthly expectations survey.

Critics, with arched eyebrows, complain that the authority has rather a lot of luck in receiving official monthly inflation and inflation expectation figures in line with its wishes.

Tweets: "The logo on the right" is the central bank. TUIK and the central bank jointly prepare tourism income (or officially "travel income" in the balance of payments (BoP))   ‘data’.

ISTANBUL BLOG writes:
The survey method and the macro data business are pure charlatanry.

Even if the interviewers in question manage to convince some real tourists to fill in the form, the output would remain a perfect nonsense due to the intrinsic weaknesses of the survey method.

Plus, a few years ago, after unidentified inflows under its net errors and omissions account smelt to heaven, the Erdogan regime transferred some of the unidentified inflows to the travel income account by ‘updating’ the tourism income data.

Big big men, meanwhile, devise ‘analysis’ based on the central bank’s BoP ‘data’ , just as they talk about gods, nations, histories and so forth with the same seriousness.

Positive real rate in September

On October 3, TUIK will release the official September inflation data and the annual figure will fall below the policy rate for the first time since July 2021.

End-2024 inflation is set to be released at around 42% y/y

TUIK’s inflation series peaked at 75.45% in May. It is now quickly falling back to the 40%s thanks to the base effect.

Putting out a headline figure of below 40% would perhaps prove too much of a stretch even for the country’s infamous statistical institute.

On August 8, Turkey’s central bank kept its end-2024 official inflation "target" unchanged at 38% in its latest quarterly inflation report.

The upper boundary of the forecast range was also left unchanged at 42%.

The inflation report also reiterated that average "seasonally-adjusted" official monthly inflation will decline to 2.5% in 3Q24 and to below 1.5% in 4Q24.

On September 5, the government cut its end-2024 inflation to 41.5% y/y in its new medium-term economic programme (OVP). 

On November 8, the central bank will release its next inflation report and updated forecasts.

Technical recession on cards

On September 5, the government also cut its 2024 official GDP growth release target to 3.5% y/y.

As things stand, a technical recession (negative official GDP growth figures posted for two consecutive quarters on a q/q basis) is on the cards.

On November 29, TUIK will release its 3Q24 data.

On September 2, it released a 0.1% q/q official growth rate for 2Q24.

On November 29, a revision to a minus 0.X% q/q rate for 2Q24 and the announcement of a minus 0.Y% rate for 3Q24 would do the job for the announcement of a technical recession.

In this case, rather than launching the rate-cutting cycle with 250-bp cuts in October and/or November, a 500-bp cut could commence the cycle in December, based on the technical recession argument.

Fed begins with a jumbo cut

Looking at the global markets, the Federal Reserve (Fed) has jumped on the global easing train with a jumbo rate cut on September 18. The Fed uses 25bp units in its policy rate. Americans dub a 50bp move "jumbo".

Turkey’s CDS remain below the 300-level, while the yield on the Turkish government’s 10-year eurobonds fell below the 7%-level thanks to the Fed.

After launching its rate-cutting cycle with a 25bp cut in June, the European Central Bank (ECB) delivered another 25bp cut on September 12.

The possibility of some "short-breathed" turbulence at the beginning of November should not be excluded. However, with the beginning of the new year rally, the easing atmosphere will come in strong.

Carry resumes with September

Since August 27, the Erdogan administration has turned to its straight line policy in the USD/TRY rate. The pair is currently drawing a line around the 34-level.

Between March and July, the Erdogan regime drew a line around the 32-level. Come August, the 33s and shortly after the 34s were seen as the new USD/TRY level.

Since the local elections that took place on March 31, the central bank has managed to build up its reserves thanks to portfolio inflows (mainly carry trade), declines in FX deposits at local banks and increases in FX loans.

With July, the portfolio inflows slowed sharply and the central bank introduced caps on FX loan growth (due to tightening concerns).

During the summer dry-up in August, portfolio flows turned negative. With September, inflows resumed.

There is now a short window ahead for renewed inflows prior to the possible shake-up in November.

 

Carry Trade Flows to Turkey (estimate)
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 9, 2024	17,925	0	0	0	0	17,925	-676	23,888
Aug 16, 2024	19,015	-225	0	0	-225	19,240	1,315	25,203
Aug 23, 2024	18,762	0	0	0	0	18,762	-478	24,725
Aug 29, 2024	17,337	0	0	0	0	17,337	-1,425	23,300
Sep 6, 2024	17,906	0	0	0	0	17,906	569	23,869
Sep 13, 2024	21,020	0	0	0	0	21,020	3,114	26,983

Table: Carry trade flows to Turkey.

 

Weekly net flows 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 2, 2024	-162	10,940	-169	-1,612	9,328
Aug 9, 2024	18	10,958	-324	-1,936	9,022
Aug 16, 2024	1,404	12,362	-298	-2,233	10,129
Aug 23, 2024	-1,026	11,336	66	-2,167	9,168
Aug 29, 2024	683	12,018	-20	-2,187	9,832
Sep 6, 2024	-864	11,155	-51	-2,238	8,917
Sep 13, 2024	1,647	12,801	-321	-2,558	10,243

Table: Net flows into Turkey’s domestic government paper and equities.

 

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 2, 2024	156,640	1,325	21,965	191,594	686	-18,809
Aug 9, 2024	157,400	760	22,725	194,229	2,634	-16,175
Aug 16, 2024	158,503	1,103	23,828	195,477	1,249	-14,926
Aug 23, 2024	160,590	2,087	25,915	199,338	3,861	-11,065
Aug 30, 2024	160,509	-81	25,834	198,245	-1,093	-12,158
Sep 6, 2024	161,312	803	26,637	199,281	1,036	-11,122
Sep 13, 2024	161,595	283	26,920	197,133	-2,148	-13,270
Sep 16, 2024	161,889	294	27,214	198,644	1,511	-11,759

Table: FX loans and deposits at Turkish banks.

After burning through about $7bn worth of reserves in August, the central bank added around $8bn to its reserves in the first two weeks of September.
 

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 13, 2024	5,274,745,527	3,838,014,895	1,436,730,632	33.82	42,487	-22,324	0	20,163	94
Sep 18, 2024	5,354,472,609	3,890,392,525	1,464,080,084	34.03	43,025

Table: Turkish central bank’s net FX position.