ISTANBUL: Turkey’s annual inflation will peak at around 70% by June before declining to near 43% by year-end, the central bank forecast on Thursday, almost quadruple its forecast before a full-blown currency crisis sent inflation to a two-decade high.
The central bank slashed its policy rate by 500 basis points to 14% last year as part of President Tayyip Erdogan’s new economic plan.
The cuts sparked a currency crisis that sent inflation to 61% in March amid a rise in global energy costs due to Russia’s invasion of Ukraine.
Governor Sahap Kavcioglu made the forecast of inflation peaking at around 70% before June in a presentation on Thursday, adding it should fall to single digits by end-2024.
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,” Kavcioglu said.
Turkish inflation to top 60% in March, stay lofty all year
By the end of this year, annual inflation would stand at around 42.8%, the governor said, near double the central bank’s previous forecast of 23.2%.
Its forecast for end-2022 stood at 11.8% in October. The median estimate in the latest Reuters poll stood at 55.5%.
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 on Thursday, adding that Turkey’s economy is seen expanding 7% in the first quarter this year.
Since the rate cuts, which Erdogan had sought for some time, the central bank has kept the benchmark rate steady in four meetings this year despite soaring inflation.
Kavcioglu defended the rate cuts, saying economic developments showed they were the correct decision. He said if it weren’t for the Ukraine conflict, the central bank might have kept its inflation forecast in January.
He also 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.
Turkish lira stood at 14.8150 at 1056 GMT, slightly weaker than its close on Wednesday.
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.