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Turkish central bank nearly doubles inflation forecast

  • Inflation seen peaking around 70 percent
  • Prices soared after currency crisis, energy price surge
  • Erdogan requested rate cuts last year
  • Central bank pursuing ‘liraisation’ strategy

Turkey’s annual inflation will peak at around 70 percent by June before declining to near 43 percent by year-end, the central bank has forecast.

The central bank slashed its policy rate by 500 basis points to 14 percent last year as part of President Tayyip Erdogan’s new economic plan.

The cuts sparked a currency crisis that sent inflation to 61 percent in March amid a rise in global energy costs due to Russia’s invasion of Ukraine.

Disinflation will begin in coming months “thanks to a gradual decrease in supply-demand mismatches and disruptions in supply chains, in addition to the results of the steps taken for price stability,” governor Sahap Kavcioglu said.

The central bank has focused on wiping out Turkey’s current account deficits by boosting exports and increasing the share of the lira in the financial system, which it says will help establish price stability.

But the global rise in commodities prices due to the Ukraine conflict has made that target more difficult to achieve.

Export-driven growth and current account balance are important for price stability, Kavcioglu said, adding that Turkey’s economy is seen expanding 7 percent in the first quarter this year.

He said tourism is expected to increase this year, despite the war in Ukraine. Russia and Ukraine are two of the biggest sources of visitors. Bookings from the European Union and the Middle East have increased sharply, Kavcioglu said.

Kavcioglu also said one of the “essential elements” of the bank’s strategy would now be increasing the share of lira in the financial system, as part of a “liraisation” strategy to achieve price stability. The ultimate target is to build a financial structure in which all “economic units” use only the local currency in decision making.