Turkish Central Bank Raises Inflation Forecasts, Anticipates 70%-75% Peak – Reuters

By Ece Toksabay, Nevzat Devranoglu, and Tuvan Gumrukcu

ANKARA – Turkey’s central bank has revised its inflation forecasts for the end of this year and the next, increasing them to 65% for 2023 and 36% for 2024, according to Governor Hafize Gaye Erkan, who emphasized the bank’s commitment to gradual monetary tightening.

Just three months prior, the central bank’s inflation report projected a year-end inflation rate of 58% for 2023 and 33% for the following year.

Inflation reached a 24-year high of 85% last year and has continued to climb amid a sustained decline of the lira, which has experienced a downward trend for three consecutive years due to an unconventional rate-cutting policy endorsed by President Tayyip Erdogan, even as prices soared.

Since Erkan took over as governor in June, the central bank has made a significant policy shift, raising interest rates by 2,650 basis points as part of a movement towards more orthodox economic policies following the May elections.

"Controlling high and volatile inflation will be a lengthy and challenging process. We will utilize all available tools decisively to ensure disinflation," Erkan stated during a speech.

At a press conference unveiling the central bank’s inflation report, she noted that disinflation would commence after peaking between 70% and 75% in May, and reiterated that monetary tightening would persist until there were clear signs of inflation improvement.

Timothy Ash, senior strategist at a financial management firm, commented on the central bank’s clear messaging, saying, "Trust us, we are tightening, and further actions should be expected after the local elections, with the goal of bringing inflation down to around 30% by the end of 2024."

As of the stated time, the lira was trading at 28.3460, showing little change for the day, but has depreciated approximately 33% this year.

In a move to combat rising inflation, which stood at 61.5% in September, the central bank increased its policy rate by 500 basis points to 35% last week, marking the third consecutive month of aggressive tightening. Erkan attributed the surge in inflation to simultaneous large shocks, while assuring that the impact of these shocks was largely complete. The bank continues to maintain a medium-term inflation target of 5%.

President Erdogan appointed former Wall Street banker Erkan as the head of the central bank following his re-election in May. She has orchestrated a policy reversal aimed at alleviating economic strain amid dwindling foreign exchange reserves and escalating inflation expectations.

Previously, under former Governor Sahap Kavcioglu, the central bank had drastically cut its policy rate from 19% to 8.5% in 2021, aligning with Erdogan’s economic strategy. These rate cuts induced a currency crisis, resulting in a 44% depreciation of the lira in 2021 and a 30% decline in 2022.

In the past, Erdogan has openly criticized strict monetary policies, positioning himself against high-interest rates; however, he has recently acknowledged that a tight monetary stance could help decrease inflation.