Notable analysis from foreign investment banks regarding the 'Inflation Report'

With CBRT Governor Hafize Gaye Erkan's statements in the latest Inflation Report presentation once again demonstrating a commitment to fighting inflation, the decline in Turkey's CDS has accelerated again. Turkey's CDS, which was at the 700 basis point level in May, fell to around 365 basis points on Friday, November 3, seeing its lowest level in the last 2 years.

Below 400 after 2 years

Turkey's CDS had fallen below the 400 level for the first time in 2 years following the positive market reception of the statements made by Erkan, who appeared before the press for the first time at the Inflation Report meeting on July 27.

The decline in CDS, which reflects the increase in foreign investor interest in TL assets, continues alongside the CBRT's determined steps toward establishing disinflation despite ongoing geopolitical risks, Turkey's continued increase in access to external financing, and positive signals from meetings held with foreign investors.

"CBRT signaled further tightening"

Foreign investment banks, in their analyses of Erkan's November 2 Inflation Report presentation, emphasized the determination that "tightening will continue until a permanent and significant decline in inflation is achieved."

In the assessment regarding Turkey in the weekly report of the US-based investment bank Morgan Stanley for CEEMEA countries, it was recalled that the CBRT's latest Inflation Report was announced in Ankara on November 2, and it was noted that the communication, made in line with the recent Monetary Policy Committee (MPC) decision texts, showed a strong focus on inflation.

The report stated that Erkan signaled that "tightening steps will continue until a significant improvement in inflation is achieved," but did not provide specific forward guidance regarding the level of the policy rate.

The report noted that the update in the CBRT's 2023 year-end inflation forecast mainly reflects the increases recorded in inflation since July, and more importantly, that the CBRT revised its 2024 year-end inflation forecast to 36 percent due to the impact of external factors such as oil prices and upward revisions in administered prices, and included the following assessments:

* Output gap estimates have pointed to a significant slowdown in growth starting from the second half of 2024. The CBRT drew attention to the fact that the effects of cumulative tightening steps have begun to be seen and to the first signs of a slowdown in domestic demand with a decline in the monthly inflation trend.

* On the other hand, the CBRT emphasized that it has not yet seen a significant improvement in the inflation outlook, and in this context, signaled further tightening. Upon the question of 'whether the CBRT aims to reach a positive real policy rate,' Governor Erkan stated that 'the CBRT examines all determinants of inflation on a monthly basis instead of focusing only on real interest rates to decide on policy steps.'

We maintain our forecast that there will be a 250 basis point increase in the policy rate in November and that the final policy rate level of 40 percent will be reached in April 2024. Depending on the inflation outlook, there is also a possibility that the policy rate will reach the 40 percent level earlier."

"Until a permanent decline in inflation is achieved..."

In the report of the US multinational investment bank and financial services company Citibank, it was emphasized that the CBRT raised its 2023 and 2024 year-end inflation forecasts to 65 percent and 36 percent, respectively, and that the revised 2023 year-end inflation forecast is generally in line with market expectations (68 percent), but the upper limit of the forecast path set for 2024 represents the possible inflation trend more realistically.

The report noted the following:

* Among the issues emphasized by Governor Erkan, the following points are important: 'the disinflation that will begin in the second half of 2024 will be supported by an increase in interest in TL-denominated assets, the balancing of domestic demand, and the anchoring of inflation expectations; tightening will continue until a permanent and significant decline in inflation is achieved; the CBRT has withdrawn over 1 trillion TL of liquidity from the market with the reserve requirement decisions it has taken between July 21 and November 2; and although there is no specific calendar for exiting the Currency Protected Deposit (KKM) program, the attractiveness of TL-denominated assets will continue to be increased.'