In December, when the Turkish currency lira suffered a serious depreciation, we expect the reflection on consumer prices to be at a very high level, as the previous cost factors are also included. In the last volatility factors, we observe the effect of unusual factors in terms of the general balance of prices, especially with the fact that it is extremely difficult to determine the price of goods and this restricts the supply in the market. Therefore, along with the 5.50% periodic inflation expectation, we expect annual inflation to jump to 26.4% in December, from 21.3% in November. This forecast also shows that annual inflation will extend the series of increases to the seventh month.
Inflation is likely to be affected by loose fiscal policies. Demanding monetary policy to be formed on the axis of low interest in this direction may contribute to the depreciation of the lira, as it erodes the real yield of the currency. Recently, the government has developed the protected TRY deposit product, which guarantees foreign exchange growth, in order to control the volatility of the lira and to reverse the financial dollarization. Frankly, we do not see a permanent exchange rate decline, as some savers may still consider staying in foreign currency more advantageous depending on the maturity and exchange rate calculation principles. In this process, we should see signs of decreasing domestic financial dollarization depending on the FX-TRY conversion percentage. These elements will consist of the contribution of the generally accepted principles in economic policies to the elements of confidence and stability. We do not think that lateral policy moves will eliminate the main factors that caused the lira to depreciate. It is clear that the continuing high loan rates do not create the desired financing cost reduction.
In this context, there is naturally a serious demand on the part of the working class to increase real wages. The government made a very high minimum wage increase in order not to oppress the working population against inflation. The reflection of the minimum wage on the prices of goods and services produced due to the additional operating costs it brings, and the short-term increase in basic consumption it brings, can be expected to cause additional inflationary effects in the first 3 months. The purchasing power eroded by inflation, which will probably move above the 30-35% band, may cause difficulties in maintaining the demand levels in the economy in terms of reducing the autonomous consumption ability. With the weakening effect of the lira in this process, its purchasing power will likely remain low. We observe that the gap between wages and prices has widened recently.
With the inflation rate we foresee for the period of December 2021, real interest rates (policy rate minus inflation) will deepen to -12.4%. This is much lower than its historical average and levels seen in other emerging markets. The variation in economist expectations is quite high for December inflation, while the market median estimate points to 27.4%, annual forecasts going up to 37.3% may cause real interest rates to be at very non-standard levels. It is worth noting that the Fed will step in with rate hikes as of 2022 and that the central banks of other developing countries tend to increase interest rates.
It seems that the Central Bank will not act with generally accepted economic approaches. Therefore, it seems that there will be no tightening response to this element of exchange rate and inflation volatility, which they consider temporarily and expect to be normalized with the new economy perspective. In this regard, we see that the plans and stances of decision makers are not similar to the 2018 period. Therefore, we expect negative real interest rates to deepen in the first months of the year. The Central Bank published its 2022 Monetary and Exchange Rate Policy document during the week, where it continued the rhetoric about the 5% inflation target. On the other hand, with our view that there is no planning in terms of monetary tightening and that the main policy instrument will not be used effectively, we predict that inflation rates, which are currently around 5 times the target, will continue to increase.
Kaynak: Tera Yatırım
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