Turkey’s central bank more than doubled its inflation forecast on Thursday, a move it hopes will bolster its credibility among investors after years of wildly optimistic projections.
(Bloomberg) — Turkey’s central bank more than doubled its inflation forecast on Thursday, a move it hopes will bolster its credibility among investors after years of wildly optimistic projections.
Governor Hafize Gaye Erkan, appointed last month, announced a new year-end inflation estimate of 58%, up from the level of 22.3% the bank had under her predecessor. The latest projections show Turkey will miss its 5% official price target over a three-year horizon.
Many analysts were expecting Erkan to unveil a much lower figure, with Bloomberg Economics predicting policymakers would bring their call to a rate in the range of 40%-44%.
Speaking at an event in Ankara, Erkan said the central bank is laying the groundwork for the start of sustainable disinflation in 2024, with an improvement in the trend of consumer prices expected in the second quarter of next year.
“We are in a transition heading toward the disinflation and stabilization periods we have envisaged,” Erkan said. “During this transition, markets are being stabilized within their own internal dynamics.”
Turkey’s inflation soared to 86% last year as President Recep Tayyip Erdogan pursued a growth-at-all-costs strategy that included ultra-loose monetary policy. Price growth is set to pick up again after slowing near 38% in June, though Erkan said it’d be a temporary acceleration.
Bloomberg Economics predicts inflation will accelerate to 55% by the end of the year because of the lira’s recent depreciation and increases in taxes and wages.
Erdogan won reelection in May, extending his rule into a third decade. His new administration has pledged a shift to more orthodox policies in a bid to attract the billions of dollars of foreign investment it needs to rebuild Turkey’s reserves as the economy emerges from a cost-of-living crisis.
What Bloomberg Economics Says…
“Turkey’s new central bank governor has disappointed financial markets with her rate hikes, but she has delivered realistic forecasts. The bank revised the year-end inflation projection significantly upward to 58% today — close to our view on price gains. What’s missing is serious policy action to bring runaway inflation closer to its target.”
— Selva Bahar Baziki, economist.
Since Erkan became governor, the central bank has raised its key interest rate by 900 basis points to 17.5%. That’s less than many analysts were expecting and leaves Turkey’s benchmark firmly in negative territory when adjusted for prices.
The central bank has said its approach will be “gradual” and that it will also rely on other tightening measures — including curbs on loan growth and credit-card spending — to reduce lira liquidity in the financial system.
“Once the disinflation process starts, temporary corrections in relative prices will be replaced by exchange-rate stability, improved current-account balance, fiscal discipline, permanent strengthening in capital flows and increased reserves,” Erkan said.
–With assistance from Kerim Karakaya and Ugur Yilmaz.
(Updates with quote from Bloomberg Economics.)
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