No drop in inflation expectation

According to the results of October’s second expectation survey by the Central Bank, the inflation expectation in the market did not drop as desired. According to the results of the same survey, it can be observed that the fall in economic growth expectations is continuing and correspondingly current account deficit figures are decreasing.

In the first survey in October, the annual inflation expectation was 7.31 percent; in the second survey in October – announced Oct. 22 – this figure was only down to 7.29 percent. These results show that the Medium Term Program (OVP) announced by the economy administration is not quite trusted in terms of inflation. Inflation expectations for 12 months and 24 months are 6.7 and 6.22 percent respectively.

It is possible to say that the present monetary policy is one reason for the pessimistic inflation expectations and thus the 5 percent Central Bank estimate was not adopted.

On the other hand, with the effect of the visible decline in economic activities recently, growth expectations in the market continue to fall. There was a continuous fall in growth expectation before; this figure again fell in the surveys in October from 3.4 percent to 3.2 percent. The fall in the industry production data recently disclosed has a serious effect on this. Within this context, the growth expectation for the year 2013 went back from 4.5 percent to 4.4 percent.

Estimates about the current accounts deficit continue to fall in parallel with growth. The end-of-year current account deficit expectation fell from $61.6 billion to $60.5 billion.

Markets are expecting the Central Bank to continue its expansionary interest policy in connection with the decline in growth. The results of the last expectation survey have strengthened this expectation in the markets.

The expectation that the Central Bank, which has cut down 0.50 points in the upper end of the inflation rate corridor in October, will make another 0.50-point cut as well in November has rather strengthened.
In short, the Turkish economy is going through a period where a fall is experienced in growth rates and in parallel with this, measures to regenerate the economy to a certain extent are being taken. This process seems to have been adopted by the markets also.

At the top of the developments that cannot be foreseen now are political uncertainties about what the developments will be in our region in the new year and how much and how Turkey will find itself inside these developments.

The fact that a concentrated period of elections is ahead and whether the growth-current account deficit balance that has been formed will be upset by possible populist policies to be adopted maintains a mystery.

The interest rate corridor the Central Bank has adopted since 2010, I think, is a factor increasing uncertainties especially regarding inflation. The cuts done at the upper end of the inflation rate corridor are not effective in developing trust. Just like the IMF, the markets also expect that normalization is provided and that the classic “indicator interest” practice will come back; however, the return to this policy will take some time, it seems.