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Turkish central bank hikes inflation view to 60%

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Inflation is expected to climb further to 84.7 percent at the end of the third quarter

Turkey’s central bank raised its annual inflation forecast to 60.4 percent for the year-end from 42.8 percent three months ago, continuing a trend of playing catch up with extreme price rises, according to a presentation by Governor Sahap Kavcioglu on Thursday.

A Reuters poll showed economists expect inflation of 70 percent at the end of this year, driven by the bank’s unorthodox interest rate cuts last year and its continued commitment to easy policy.

Kavcioglu, whose bank has kept its policy rate steady at 14 percent despite the soaring costs of living, said it will continue to take steps to manage any extraordinary developments in commercial and consumer loans, which have cooled recently.

The central bank also lifted its end-2023 mid-point forecast to 19.2 percent, from 12.9 percent three months ago, with Kavcioglu predicting a quick decline in inflation as policy steps take effect and the current account balance reaches sustainable levels.

“With the measures taken and the normalisation of conditions … a rapid fall in inflation will be achieved towards levels in harmony with our forecasts,” he said.

The bank’s quarterly presentation showed the estimated range of annual inflation reaching nearly 90 percent this autumn before easing. It neared 79 percent last month following a series of unorthodox interest rate cuts last year and rising energy prices.

The central bank, under pressure from President Tayyip Erdogan for monetary stimulus despite inflation being at a 24-year high, targets a range around 5 percent and has consistently underestimated price pressure over the last two years.

Kavcioglu said that while consumer price inflation (CPI) remained above expectations in June, core inflation showed a more positive outlook and cooling demand should help in the second half of the year.

He was also upbeat on the current account deficit, which has risen this year. The balance will turn around, he said, once global commodity prices normalise, helped by Turkish tourism revenues that have far exceeded expectations.

The Turkish lira weakened slightly to 17.931 by 0939 GMT. It is nearing all-time lows touched during a December currency crisis set off by the unorthodox rate cuts, which also sent inflation soaring.

Inflation is expected to climb further to 84.7 percent at the end of the third quarter before easing to 70 percent by year end due to so-called base effects from the previous year, according to the Reuters poll last week.

The inflation surge began last autumn as the central bank gradually cut its policy rate by 500 basis points to 14 percent, in an easing cycle sought by Erdogan to boost exports, investment and economic growth.

But the easing drove a 44 percent slide in the lira last year. It has weakened another 26 percent this year, stoking import prices and eroding Turks’ earning and savings.

The central bank has held its policy rate at 14 percent since December and it is expected to remain there at least another year, according to the poll.