Starting from the last months of 2021, in line with the instructions of President Tayyip Erdoğan, the CBRT reduced the policy rate from 19% to 8.5%. This easing cycle caused a currency crisis and fueled inflation, and after peaking at 85% last year, the CPI decreased to 50.5% in March due to the base effect and the decrease in the cumulative loss in TL.
Whatever result comes out of the election will end
Even though there are opponents, economists think that the policies implemented in Turkey for 1.5 years will come to an end, regardless of the outcome of the election, and will return to orthodox policies. This expectation is supported by the idea that the current economic order is not sustainable and by political developments. All 21 economists responding to the survey predict that the one-week repo rate will be kept constant at the current 8.5% level at the monetary policy committee meeting this week, but policy rate level forecasts at the post-election meetings are mostly up.
CBRT is expected to keep the interest rate unchanged at 8.5%
In a research note, JPMorgan stated that they expect the CBRT, which did not signal a change at the last MPC meeting before the May 14 elections, to keep the interest rate unchanged at 8.5%, adding: “The CBRT stated that the current monetary policy stance in its March interest rate decision was sufficient to support the necessary recovery after the earthquake. “We expect the CBRT to stay on hold at 8.5% at the MPC meeting scheduled for May 25.”
Uncertainty is high
Inflation, which reached its peak in the last 24 years, led to serious decreases in the purchasing power of households, and this process had a negative impact on the support of Erdoğan voters. JPMorgan also stated that there is high uncertainty about the decisions to be made at the PPC meeting to be held on June 22 if the presidential elections reach the runoff. The median forecast of 11 economists answering the question in the Reuters survey predicts that the CBRT’s one-week repo rate will reach 24% in the third quarter and 25% in the fourth quarter after the election. By the end of 2024, the policy rate is expected to decline to 16.5%.
The end of 2025 forecast is shaped as 19.3%
While the high course of inflation is expected to continue despite heavy interest rate hikes, the median forecast of 31 economists is that the CPI will decline to only 46.4% at the end of the year. While the end of 2024 forecast is 28.8%, the forecast for the end of 2025 is 19.3%. The median forecast for economic growth in 2023 by 34 economists in the survey is 2.6%. This is almost half the government’s estimate of 5% before the earthquakes that affected 11 provinces in February. Authorities are of the opinion that the damage caused by the earthquakes will reduce the growth rate by 1-2%.
By 2022, this goal had become impossible to achieve.
In the survey, growth median projections are 3% for 2024 and 3.8% for 2025, with the government’s estimate of 5.5% for both years. Since the CBRT started interest rate cuts at the end of 2021, it has been defending the view that price stability will be achieved by achieving a permanent surplus in the current account balance, thanks to the government’s policies that prioritize growth, exports and investment. However, due to the war in Ukraine and the declining foreign demand due to the global tight monetary policy, it became impossible to reach this target in 2022.
The government’s estimates for these years are 1.4% and 0.9%, respectively.
According to the median forecast of 16 economists surveyed, the current account deficit is expected to amount to 4.4% of gross domestic product (GDP) in 2023. This figure is well above the 2.5% target in the Medium Term Program published by the government in September. The current account deficit is expected to be 3.4% in 2024 and 2.5% in 2025, while the government’s projections for these years are 1.4% and 0.9%, respectively.
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