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Deutsche Bank sees strong disinflation in Türkiye, optimistic about economic rebalance without recession

Türkiye is likely to see strong disinflation over the coming months and a rebalancing of the economy without a hard landing, according to a Deutsche Bank strategist.

Since last year’s elections, Türkiye has undergone a major shift toward orthodox economic policies to bring down inflation, which hit 75.45% in May, up from April’s 69.8%, before dropping to 71.60% in June.

Mehmet Simsek, Türkiye’s finance and treasury minister, said the May figure was the peak level before the beginning of a disinflation process.

The Turkish Central Bank forecasts a year-end inflation rate of 38%.

Speaking to Anadolu, Hans-Christian Wietoska, head of Central Eastern Europe, Middle East and Africa Research at Deutsche Bank, said Türkiye has completed the first phase of rebalancing its economy and is now entering the second stage.

“We see inflation at around 40% by year-end due to slowing domestic demand, base effects and the recent stability of the lira. We expect a strong disinflation process,” he said.

“The key question, and also part of the second stage, is getting inflation to 20%. This is the next step, and this is a challenge because 40% will be more or less done by the end of the year,” said Wietoska, adding that it will be critical for the central bank to maintain a tight monetary stance.

The economy will see a cooldown in the second stage and it will be important how the central bank reacts, he said.

Deutsche Bank economists forecast Türkiye’s GDP growth at 3.5% this year, relative to an average growth rate of around 5% over the past five years.

The International Monetary Fund (IMF) expects Türkiye’s economy to grow by 3.6%, while the Organization for Economic Co-operation and Development (OECD) forecasts 3.4% growth in 2024.

Growth is slowing, and it will be a challenge in the last quarter of this year and early next year in the first quarter, according to Wietoska.

“It is not going to be easy, but no country in the world has been able to bring inflation down from above 75% without something to break. Türkiye could be a unique case if they are able to achieve the rebalancing without a hard landing,” he said.

“We are quite optimistic that Türkiye can achieve this, but there should be no policy mistake in the middle, as it can backfire.”

When inflation starts to fall and the economy slows down, it is the right time to cut rates, Wietoska said.

He added that they do not believe the central bank will slash interest rates by more than 500 basis points by the year’s end, which would bring it down to 45% from the current level of 50%.

Moody’s review in focus

Since Türkiye shifted to orthodox macroeconomic policies, there has also been an improvement in the stance of international investors, according to Wietoska.

Global investors are eying Turkish lira bonds, with $8.5 billion inflows already seen over the past eight weeks, he said.

“It can even go to $20 billion. There is room for at least another $10 billion to $15 billion inflows by the end of this year. More can follow next year, with room for overall foreign exposure of $30 billion to $40 billion, compared to the current around $10 billion,” Wietoska said.

In a research note published early this month, Deutsche Bank said local Turkish bonds “offer extremely attractive entrance levels.”

Markets will also be focusing on Moody’s review of Türkiye, due to be announced on Friday.

The global agency revised Türkiye’s outlook to positive from stable, affirming its ‘B3’ credit rating in its January review. Current expectations are that the rating will be upgraded to ‘B2.’

In March, Fitch Ratings upgraded Türkiye’s credit rating from ‘B’ to ‘B+’ and its outlook from stable to positive, while S&P has also raised its grade to ‘B+’ from ‘B’ and assigned a positive outlook.