Macro Analysis /

Turkey: The de-anchoring of inflation expectations in one chart

  • Lira depreciation has caused both survey and market-based inflation expectations to balloon

  • 12-month ahead inflation rose to 21.4% from 15.6% in November and 10yr breakeven rose to 21% from 16.8% in October

  • Sustaining unorthodox policy will cause further de-anchoring of expectations, necessitating future rate hikes

Turkey: The de-anchoring of inflation expectations in one chart
Tellimer Research
10 December 2021
Published byTellimer Research

With the lira continuing to trade weaker as President Erdogan doubles down on his low-rate rhetoric in recent weeks, the currency collapse has begun to pass through to a thorough de-anchoring of inflation expectations in Turkey (or rather a firmer anchoring well into the double-digits).

Turkey inflation expectations (%yoy)

Indicators of inflation expectations have ballooned, with today's CBRT inflation survey showing a rise in expected inflation over the next 12 months to 21.4% from 15.6% in November and expected inflation over the next 24 months rising to 14.4% from 11.8% (well above the CBRT’s 5% target).

Market-based indicators have had a similarly sharp rise, with the 2-year breakeven rising to 26.2% from 17.6% in mid-November, and the 5-year and 10-year breakevens rising to 25.6% from 18.5% and to 21% from 17.1%, respectively, over the same period.

While the rise is more pronounced for shorter-term expectations, showing that survey participants and markets both expect a slight moderation over time, longer-term expectations have also risen substantially and are firmly in double-digit territory (and above 20% for the 10-year breakeven).

This illustrates the harmful byproduct of Erdogan's obsession with low rates: his unorthodox policy triggers lira depreciation, which passes through to inflation, subsequently de-anchoring inflation expectations, and (ironically) necessitating more aggressive and prolonged rate hikes in the future to tame inflation and re-anchor expectations.

Needless to say, if Erdogan's preference is for lower rates over the long term (and not just temporarily), then his policy stance is counterproductive in the extreme. And, the longer his unorthodox policy is sustained, the more difficult it will be become to build back credibility and re-anchor expectations at single-digit levels. Recent data on expectations prove just how dangerous a game Erdogan is playing.

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