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Turkey inflation to fall 46% by end-2023 despite rate hike

Turkish interest rates Reuters/Lisa Marie David
Turkey's annual inflation surged to a 24-year high of 85.51% last October, mainly due to lira depreciation

Inflation in Turkey will dip to 46.4 percent by end-2023, a Reuters poll showed, while the policy rate is seen rising to 24 percent next quarter after upcoming elections that pose the greatest challenge to President Tayyip Erdogan’s 20-year rule.

Turkey’s consumer price index surged in the wake of a currency crisis sparked by an unorthodox easing cycle in late 2021. Interest rate cuts were part of Erdogan’s policy of prioritising growth, investment and low borrowing costs.

The inflation surge, to above 85 percent last year, hit Erdogan’s popularity and polls show him trailing his main challenger. Economists expect a move towards more orthodox policies after the May 14 election.

All 21 economists in the poll expect the central bank (CBRT) to keep its benchmark rate steady at 8.5 percent this week, its last monetary policy committee meeting before the vote.

“We expect the CBRT to stay on hold at 8.5 percent,” JP Morgan said in a note, adding that policy uncertainty for future meetings remained high.

After this week’s meeting, the monetary policy committee will next convene on May 25. However the outcome of the presidential election may not become clear until after a potential second round vote on May 28.

Turkey’s policy rate was seen rising to 24.0 percent in the third quarter, medians showed. It was seen rising to 25.0 percent in the fourth quarter before falling to 16.5 percent by end-2024.

Despite expected interest rate hikes, inflation was seen remaining elevated through the year and falling only to 46.4 percent at end-2023, the poll found, compared to 50.5 percent in March. It was seen declining to 28.8 percent by end-2024 and 19.3 percent by end-2025.

While slashing its policy rate from 19 percent at the end of 2021, the central bank has said price stability will be achieved when Turkey flips its chronic current account deficit to a surplus.

Ankara says this will be achieved through its import-boosting economic plan. But the war in Ukraine and a decline in foreign demand dashed those hopes in 2022.

The current account deficit in 2023 is expected to be 4.4 percent of Turkey’s gross domestic product (GDP), the median showed, compared to a government forecast of 2.5 percent.

The deficit was seen at 3.4 percent in 2024 and 2.5 percent in 2025, compared to government predictions published in September of 1.4 percent and 0.9 percent, respectively.

GDP growth was seen at 2.6 percent this year, according to the median estimate of 34 economists. The government had forecast growth of five percent before massive earthquakes in February that are expected shave up to two percentage points off economic growth.

The median growth forecast stood at 3.0 percent for 2024 and 3.8 percent for 2025 in the poll, compared to the government’s 5.5 percent forecast for both years.