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Goldman Sachs: Turkey’s inflation above 40% in 2022 – Turks seek dollar support

Inflation in Turkey is expected to remain above 40% for most of 2022, according to a note from Goldman Sachs, which forecasts that the rate will exceed the recently announced 36% of last month.

Annual inflation in the country accelerated to 36.1% in December, the Turkish Statistical Service announced on Monday, setting a new record, rising 13.58%.

Turkey currently holds the eighth highest inflation rate in the world, Reuters reported on Monday, citing a list of Trading Economics, which puts Recep Tayyip Erdogan’s country behind Zimbabwe and Argentina and ahead of Iran and Ethiopia.

The country’s December inflation signals the highest inflation in almost two decades since the Turkish president came to power, and threatens to further erode support for the ruling Justice and Development Party (AKP), which is declining and has forced him to resign. Erdogan to resort to practices of creating a civil climate.

The Turkish lira lost 44% of its value last year when it hit record lows against the dollar following repeated cuts in central bank lending, a move essentially ordered by Erdogan as part of his orthodox policy. argues that high borrowing costs are the cause of inflation and not a brake on price gains.

Reuters quoted economists on Monday as predicting that inflation could reach 50% by spring without a reversal in monetary policy: “Prices should rise immediately and aggressively because this is urgent,” Ozlem said. Derigi Sengiul, founder of Spinn Consulting in Istanbul.

Sengül ruled out central bank action, saying annual inflation “would probably reach 40-50% by March”, at which time administrative price increases would have been added to the mix, including a 50% increase to the bottom. salary.

The Turks continue to hold on to the dollar

Turkish investors continue to cling to foreign currencies, undermining President Recep Tayyip Erdogan’s plan to support the pound without raising interest rates.

According to the latest data from the Central Bank, the companies increased their foreign currency investments by about $ 1.6 billion in the seven days to December 24, taking advantage of the rally that saw the pound almost double its value that week. While households cut their positions by just over $ 100 million, there was almost no reduction in total foreign currency deposits, which reached a record $ 239 billion.

According to Bloomberg, this love for the dollar in Turkey is purely the result of monetary policy that for years remained too lax to put an end to inflation and the result was to pay the pound. It also highlights the challenges facing authorities in persuading investors to convert their savings into local currency, which has lost more than 85% of its value against the dollar since 2012.

“The reason people have been accumulating foreign currency to date has been distrust and the issue of trust still exists,” said Evren Kirikoglu, an Istanbul-based independent strategic analyst who blatantly disproved Turkish Finance Minister Nebuchadnezzar. , who stated a few days ago that the people have confidence in the economic policy of the Turkish president.

Instead of raising borrowing costs to attract savers to pound accounts, the government says it will compensate pound holders for any foreign exchange losses in excess of their short-term deposit rate – which is currently falling by about 19 percentage points below measured inflation.

The official narrative is that this new financial instrument is changing the game because it will reduce the demand for dollars and euros that has burdened the currency and at the same time allow interest rates to remain low and stimulate growth.

Little interest

Interestingly, so far the appetite for the product remains lukewarm, with just 84 84 billion ($ 6.3 billion) out of a total of ,2 5.2 trillion in deposits shifting to new foreign currency-linked deposits, according to “People do not seem to understand the new product and are afraid that some future changes could prevent them from buying back the currency they sold,” Kirikoglou said.

Combined with the latest official data on reserves, the flow suggests that foreign exchange market interventions may have played a much larger role in stimulating the recent rise in the local currency.

Last month, the pound rose 79% from a record low of 18.3633 on December 20 to a one-month high of 10.2512. This coincided with the withdrawal of $ 3.53 billion in the central bank’s net foreign exchange reserves in the week ended December 24, falling from the end of November to $ 16 billion.

With inflation hovering around 36% and Turkey’s official stocks falling, the question for some is how much more policymakers can stand in the way of dollar demand.

Foreign exchange interventions

The magnitude of recent interventions is reminiscent of transactions that took place between 2018 and 2020, when government lenders systematically flooded the market with unannounced dollars to support the pound. The government has denied reports of so-called backdoor sales.

Turkey’s gross reserves amount to $ 110.9 billion. However, the net reserves – which many economists use as a gauge of how much firepower policymakers have at their disposal – are now just $ 8.6 billion. In fact, a few hours ago it became known trick of December 31, 2021, during which the central bank managed to record profits of 10 billion dollars in one day and instead of a loss of 70 billion pounds, to close the year with a profit of 60 billion pounds.

There are signs that the market is already faltering, with the pound slipping to 13.33 per dollar on Tuesday to return to a record low and extend its fall from the December high to 23%.

“I guess people will no longer run for dollars, but the key point is to attract foreign exchange holders to the system, otherwise the central bank can no longer meet the demand of citizens for foreign exchange with its reserves,” Kirikoglou said.

Petros Kranias

Read also:

* Turkish Finance Minister announces slow drop in inflation until 2023

* New losses for the pound: Concerns grow, enthusiasm for Erdogan’s announcements drops

* Turkey: Lawsuits against former central bankers for manipulating the pound

* Erdogan arrogance: I have thrown inflation in the past, I will do it now

* Turkey: Erdogan raises tobacco, alcohol tax by 47% – Rage over prices, 150% on bread

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Source From: Capital

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