Turkey Signals Tighter Policy With Inflation Heading To 75%

Customers at a local market in Bodrum, Turkey, on Thursday, July 6, 2023. The lira has lost 28% of its value so far this year, the biggest decline among 31 major currencies tracked by Bloomberg, after the Argentine peso.

(Bloomberg) -- Turkey's central bank signaled it plans to tighten monetary policy further after lifting inflation forecasts for the next two years, with a peak expected next May at as high as 75%.

Governor Hafize Gaye Erkan announced a new end-2023 estimate of 65%, up from a previous forecast 58%, and said price growth will finish next year at 36% in a revision from 33%. Speaking at an event in Ankara, Erkan said she expects disinflation from the second half of next year.

“Monetary tightening will continue until a marked improvement in inflation,” Erkan said.

The quarterly report has taken on new prominence since Erkan's appointment in June, with officials now saying they want to tether monetary policy to the projected path for consumer prices, as opposed to the current inflation rate. Bloomberg Economics expected its outlook to be lifted by around 10 percentage points for this year and next.

The prospect of a more hawkish approach didn't lift the lira, which traded 0.1% weaker against the dollar, the second-worst performance on Thursday among a basket of 31 major currencies tracked by Bloomberg.

The yield on the government's 10-year lira bonds rose nine basis points to 28.37%, headed for a record high on a closing basis.

As attention turns to next year, the inflation momentum has shown little sign of slowing, though price increases are decelerating on a monthly basis.

In annual terms, price growth is running at more than 12 times the official target and probably accelerated close to 62% in October, according to the median forecast of economists surveyed by Bloomberg. It briefly exceeded 85% last year.

What Bloomberg Economics Says...

“The Turkish central bank's revisions to its inflation forecast signal a tighter monetary stance is coming. We expect this to take the form of a higher policy rate, tighter credit conditions and more stringent banking regulations. That's good news for the struggling currency, but likely to be negative for growth.”

— Selva Bahar Baziki, economist. Click here to read more.

Erkan attributed faster inflation from June to September to “multiple shocks” and said recent tax hikes contributed 2.5 percentage points to the headline rate. The role of excessive domestic demand is now fading, she said, and some indicators for prices in October point to a decline in the underlying trend of monthly inflation.

The emerging picture for prices explains the urgency of a monetary tightening cycle that's already more than quadrupled Turkey's key rate to 35%. Immediately after the previous inflation report in July — which also revised the outlook sharply higher — President Recep Tayyip Erdogan named new members to the central bank's decision-making body, a move followed by three large rate hikes of as much as 750 basis points.

Erkan, alongside officials such as Finance Minister Mehmet Simsek, has been at the forefront of a policy shift since Erdogan's reelection in May, as a new team of technocrats unwinds unorthodox measures blamed for driving away foreign investors and causing a series of currency crises.

Investors have meanwhile been calling for a more hawkish stance from the central bank, given that policy rates remain well below zero when adjusted for current inflation. Global lenders like Morgan Stanley and JPMorgan Chase & Co. see Turkish hikes peaking only when the benchmark reaches 40%-45%.

Officials like Simsek have in turn argued they are focusing on the differential between deposit rates and expected inflation over the next 12 months, which indicates policy is already tighter than it appears otherwise.

--With assistance from Baris Balci and Patrick Sykes.

(Updates with lira, bonds starting in fifth paragraph.)

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