Turkey’s central bank unexpectedly didn’t change its inflation projections for this year and next, reiterating an outlook that’s far more optimistic than the views in the market.
(Bloomberg) — Turkey’s central bank unexpectedly didn’t change its inflation projections for this year and next, reiterating an outlook that’s far more optimistic than the views in the market.
Governor Sahap Kavcioglu said inflation should slow to 22.3% at the end of 2023 and 8.8% in 2024. Speaking at the presentation of this year’s second quarterly inflation report on Thursday, Kavcioglu cited the lira’s stability and cheaper global commodity costs as factors for a slowdown in Turkey’s price growth.
Inflation remains a major vulnerability for Turkey as it emerges from its worst cost-of-living crisis in two decades. It’s also been a critical issue in a tight election this month in which President Recep Tayyip Erdogan faces the stiffest challenge of his two decades in power.
While acknowledging the burden of high prices, Erdogan has promised his unconventional policies of keeping interest rates low will succeed in reining in galloping costs. The central bank has largely followed the president’s lead, reducing its benchmark by 5.5 percentage points since August to 8.5% before pausing for the past two months.
“The policies we have implemented have the power to lower inflation,” Kavcioglu told reporters in Ankara. When asked how the approach may shift depending on the elections, he said there will be no change to policies that were determined at the start of the year in the bank’s strategy document.
Economists polled by Bloomberg forecast inflation will plateau around 44%-45% for the rest of the year after reaching an annual 43.7% in April. Bloomberg Economics expects the rate will settle at 43% at the close of the year.
What Bloomberg Economics Says…
“The overly optimistic decision to keep the outlook unchanged was likely motivated by base effects, which we expect to be offset by inflationary pressures from fiscal and monetary policies.”
— Selva Bahar Baziki, economist. Click here to read more.
Price growth spiraled and shot past 85% late last year in Turkey, which hasn’t met its 5% inflation target for over a decade.
Mounting expectations for the lira’s depreciation after the May 14 elections are meanwhile posing a threat to consumer prices. The Turkish currency is among the worst performers in emerging markets so far this year with a drop of almost 4% against the dollar.
Global banks including HSBC Holdings Plc and JPMorgan Chase & Co. see the lira sharply weaker after the elections regardless of the outcome. The central bank has responded by trying to offset some of the pressure on the currency, last telling lenders to avoid “non-urgent dollar sales” to firms.
–With assistance from Baris Balci and Ugur Yilmaz.
(Updates with governor’s comment in fifth paragraph, adds details from inflation report.)
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