Official data revealed that Turkish consumer confidence remains below neutral levels, with pessimism looming over consumers’ expectations for the next 12 months. This coincides with the Turkish Central Bank’s decision to keep its key interest rates unchanged at 50% for the second consecutive month. Bank officials anticipate inflation in Turkey, which still ranks among the world’s fastest, to begin declining starting next month and end the year at 38%. However, current available figures indicate the inaccuracy of these projections amidst citizens’ pessimism.
The Turkish Central Bank aggressively raised interest rates by 4150 basis points (41.5%) since June 2023, but kept it unchanged at 50% in April last year to give room for the tightening monetary policy approach adopted earlier to take effect. This approach included a 500 basis point increase in March. Finance Minister Mehmet Şimşek stated last week that inflation would start to decline after reaching its peak in May, but the month ended without any significant change.
The Turkish government announced a three-year austerity plan aimed at reducing public spending to curb inflation, revealing measures to limit spending on employment and transportation for public employees. The Bank’s continued halt in raising interest rates for a longer period is crucial to maintaining the momentum of foreign inflows into local assets as investors place their confidence in Turkey’s efforts to reduce inflation and return to a more traditional economic policy. Earlier last month, the Turkish Central Bank raised its year-end inflation forecast to 38%, with Governor Şahap Kavcıoğlu stating that he would do everything possible to avoid any deterioration in the inflation situation, reaffirming the bank’s stance on tightening monetary policy.
The Consumer Confidence Index, calculated from the results of the Consumer Trends Survey conducted in collaboration with the Turkish Statistical Institute and the Central Bank, reached 80.51 points in May, compared to 80.46 in April. According to the Turkish Statistical Office, the Consumer Confidence Index can take values ranging from 0 to 200, where a reading above 100 indicates consumer confidence in an optimistic state, while a reading below 100 reflects consumer pessimism. The subcomponents of the index fell within the pessimism zone, with the current financial situation of households scoring 65.3 points, while expectations for the financial situation of households in the next 12 months recorded 82.8 points. Data from the index revealed expectations for the general economic situation in the next 12 months at 78.3 points, while considering spending on durable goods in the next 12 months scored 95.6 points. Since the beginning of the year, the Turkish lira has depreciated by 10% from levels of 29.7 lira to the dollar, according to Istanbul Stock Exchange data.
The Turkish Central Bank surprised everyone at its meeting two months ago by deciding to resume its interest rate hike cycle after pausing at the previous meeting. Interest rates soared to their highest levels in about a quarter century, contrary to analysts’ estimates of interest rate stability. The Monetary Policy Committee of the Turkish Central Bank, in its first meeting chaired by the new governor, Fatih Kayahan, decided to raise interest rates by 500 basis points or 5% to reach 50%, while the bank decided to keep interest rates unchanged at the previous meeting. Overall, since last June, the Turkish Central Bank has raised interest rates by about 4150 basis points or the equivalent of 41.5%, up from levels of 8.5%.
The Turkish Central Bank announced a significant loss of 818.2 billion lira (25 billion dollars) for 2023, a sharp decline from its profits of 72 billion lira (2.2 billion dollars) achieved in 2022. The loss, attributed to a variety of factors including rising interest rates and the government-supported savings program, raised alarms about the effectiveness of the country’s economic policies, raising questions about the currency protection system, locally known as the KKM, which the government introduced to protect depositors from the depreciation of the lira.
Meanwhile, the real estate sector in Turkey is facing consecutive setbacks, experiencing a significant decline recently, which is a notable indicator of the challenges facing the construction sector, and it opens the door to rethinking the future of the real estate sector in Turkey and the factors influencing it. According to the latest data from the Turkish Statistical Institute, real estate sales in Turkey decreased by 17.5% in 2023 compared to the previous year, reaching 1,225,926 units, marking the lowest sales levels in the last 9 years. The share of sales to foreigners from the total real estate market in Turkey decreased to 2.9% in 2023, compared to 4.5% in 2022, reflecting Turkey’s declining share in the international real estate market to less than 1%. December 2023 witnessed a sharp decline in real estate sales to foreign investors, with a decrease of 67.7% compared to the same month in 2022, leading to a reduction in the share of sales of properties targeted at foreigners to only 1.5% of total sales, the lowest percentage since July 2020.
Official data showed that Turkish industrial production declined by 0.3% on a monthly basis in March, in a seasonally adjusted reading. However, the Turkish Statistical Institute reported a 4.3% increase in production on an annual basis for March. Meanwhile, the Turkish Central Bank incurred a loss of 818.2 billion lira or 25 billion dollars in 2023, marking the first decline after years of consecutive profits. This was driven by a sharp increase in interest rates and the cost of the government-supported savings program designed to protect depositors from currency depreciation. The focus remains on the mechanism known locally as “KKM,” designed to serve as a support for the lira, introduced by authorities in late 2021.
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