Turkey’s central bank hikes 2022 inflation forecast to 65.2%

REUTERS/Afolabi Sotunde

• Inflation climbed to 24-year high of 83.45% in September
• The central bank has pursued unorthodox rate-cutting policy
• Governor Kavcioglu says says inflation will decline rapidly
• Turkey is set to hold elections next summer

Turkey’s central bank has lifted its inflation forecast for the end of 2022 to 65.2 percent from 60.4 percent, governor Sahap Kavcioglu said on Thursday, marking the fourth rise this year, as he conceded that the bank had not been “very successful” in curbing price growth.

Turkish annual inflation climbed to a 24-year high of 83.45 percent in September after the central bank surprised markets by cutting rates twice in two months. The cuts came central banks elsewhere tighten policy, making Turkey an outsider with a deeply negative real rate.

The central bank cut rates again this month, by a larger than expected 150 basis points, after President Tayyip Erdogan called for single-digit interest rates by year-end. It said a similar cut would be delivered in November, ending the easing cycle.

The governor’s presentation indicated that inflation was seen peaking around 85 percent in late autumn before falling.

“Inflation will decrease rapidly on the back of continued supply, the maintenance of stability in exchange rates and the normalisation of pricing behaviour,” Kavcioglu told reporters at a news conference in Ankara.

Asked whether the bank had succeeded in lowering inflation, Kavcioglu said, “We cannot consider ourselves very successful. God willing, the decisions we have taken will make us successful in a short time.”

The bank also raised its end-2023 mid-point inflation forecast to 22.3 percent from 19.2 percent.

The governor said the two prerequisites for price stability were achieving a lasting current account surplus and the dominance of the lira in households, firms and banks’ balance sheets.

The lira traded at 18.6905 as Kavcioglu finished speaking, unchanged from Wednesday’s close. Driven by the unorthodox easing cycle sought by Erdogan, the lira plunged 44 percent in value in 2021 and has weakened a further 29% this year.

Heightened Pessimism

At its monetary policy committee meeting last week, where the bank made its 150 basis point cut to 10.5 percent, it vowed to halt the easing cycle after another similarly-hefty cut next month.

“We are going through a period of heightened pessimism regarding global growth,” Kavcioglu said. “In such an environment, we believe financial conditions should be supportive.”

“This is important to sustain the momentum we achieved in industrial production, which is the most important element of our structurally strengthened current account surplus capacity.”

Erdogan has prioritised exports, production and investment as part of an economic programme that aims to lower inflation by flipping Turkey’s chronic current account deficits to a surplus.

That target is all but unattainable this year due to the surge in energy prices and a global economic slowdown that is likely to hit Turkey’s exports. The government does not expect to see a surplus in the next three years.

Turkish bank executives raised concerns with authorities this week that a year of new rules forcing them to buy government bonds could ultimately destabilize the sector, even as it sharply reduces the costs of a big government spending plan ahead of presidential and parliamentary elections next year.