Striking dollar prediction from the famous bank for the post-local elections: Will there be a new period of weakness? – Last Minute Economy News

HSBC stated that they do not expect any major policy changes after the March 31 local elections. Predicting that a soft landing in the economy will continue to be a priority, HSBC emphasized that this means that the correction of imbalances will be slow.

“Further tightening will help cool the economy more quickly, but we continue to expect a more gradual approach,” HSBC said, as quoted by My Economy.

The evaluations in the report published by HSBC yesterday are as follows:

“Turkey is going to local elections on March 31. One of the questions we are frequently asked is whether the AKP’s strong showing in the local elections will provide policy makers with the opportunity to implement a more assertive economic stabilization program to combat high inflation and large domestic and external deficits.

While they agree with the need for further interest rate hikes and a tighter fiscal stance, recent comments from Turkish policymakers suggest their number one priority is to get the economy on a soft footing, even if that means macro imbalances will continue for some time.

We think that good support for growth will continue to be an important issue after the elections are over.

WE DO NOT EXPECT WEAKNESS IN TL AFTER THE ELECTION

We also received many questions about the exchange rate. Following the general and presidential elections held at the end of May 2023, the lira lost 20 percent of its value against the US dollar in June. This experience and recent policy decisions in Egypt have raised questions about whether the lira will experience a new period of weakness following the local elections. We think this is unlikely because policymakers’ priorities appear to have changed.

When the new economic management team takes over in June 2023, we believe they will prioritize stabilizing the balance of payments through a combination of monetary tightening and depreciation of the REER aimed at cooling the economy. Meanwhile, the latest communication from the central bank suggests some realignment of policy priorities.

The final declaration of the February MPC meeting included a guidance that the current “tight” policy stance “will continue to contribute to the process of real appreciation of the Turkish Lira, which is one of the basic elements of the fight against inflation.”

INFLATION DYNAMICS CONTINUE TO BE CHALLENGING

This is the first time the bank has referred to real appreciation so openly. CBRT tightened monetary policy more than we expected in the second half of last year and made a surprise increase in March, raising the interest rate to 50 percent. However, inflation dynamics remain challenging. We believe there are two reasons for this.

First, real interest rates (calculated using realized inflation, which we believe is more appropriate for Turkey) remain negative. Second, monetary tightening was not accompanied by fiscal tightening or a more restrictive incomes policy. Taken together, this policy backdrop has led to some slowdown in domestic activity, but from an exceptionally strong starting position. As a result, the improvement in inflation and external dynamics has remained limited so far.

OUR YEAR-END INFLATION FORECAST IS 49 PERCENT

We think that inflation tends to greatly exceed the CBRT’s end-24 and end-2025 forecasts of 36 percent and 14 percent. Our estimates are 49 percent and 29 percent, respectively.

The current account deficit reached $45 billion, or 4.1 percent of GDP, last year. Before the CBRT started its tightening cycle in June, the 12-month deficit reached $60 billion (6.1 percent of GDP) in May 2023. Compared to 2022, the trade deficit improved slightly to $87 billion, while the services surplus increased by 5 percent to $52 billion.