Turkey Rewrites All Inflation Forecasts But Won’t Budge on Rates

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Turkey's central bank conceded it will have to navigate a vastly different inflation environment than it anticipated just months ago, blaming the global commodity rally but signaling no change in the direction of its monetary policy.

Governor Sahap Kavcioglu said Thursday that consumer inflation will be around 42.8% at the end of this year, up from the central bank's January forecast of 23.2% and more than eight times its official target. It's set to reach 12.9% at the end of next year and around 8.3% in 2024.

	CBRT Survey	CBRT Projection	Official Target	Government Projection
Year-end 2022	46.44%	42.8%	5%	9.8%
Year-end 2023	N/A	12.9%	5%	8%

The latest outlook is still no reason to tighten monetary conditions because most of the price increases are down to the Russian war-induced surge in energy and food costs, Kavcioglu said. The central bank has held interest rates for four consecutive months this year after a cycle of aggressive cuts in late 2021.

Turkey doesn't have to increase rates just because other central banks are doing so, Kavcioglu said at a news conference where he unveiled the quarterly inflation report. “Each country has to apply its own policies” he said.

The lack of reckoning will leave Turkey, whose real rates are already the world's lowest, even more out of step with the global economy. The U.S. Federal Reserve last month enacted its first rate hike since the pandemic struck, and the European Central Bank is also moving toward tightening as it winds down emergency stimulus.

What Bloomberg Economics Says...

“The central bank has kept interest rates on hold and will probably continue to do so with looming elections, due in 2023, and a political leadership that doesn't believe higher interest rates can tame inflation..”
--Ziad Daoud, chief emerging markets economist. For the full react, click here.

Meanwhile Turkey's elevated inflation, and resistance to raising rates, have pushed its borrowing costs deeper below zero when adjusted for prices.

The lira, which largely remains range-bound amid intermittent and unannounced interventions by state banks, barely reacted as Kavcioglu spoke. It was trading little changed at 14.8122 per dollar at 1:37 p.m. in Istanbul.

But the currency's recent calm is hardly indicative of growing concerns over inflation, especially as cost pressures continue to build. Turkey's factory-gate prices in March rose an annual 115%, notching one of the fastest increases around the world.

Kavcioglu said consumer price growth, currently at a 20-year high of over 61%, could start slowing as early as June and disinflation will gather momentum at the end of the year.

One key part of the strategy is to keep Turkey's currency on a leash by encouraging a diversification of savings into liras and away from foreign currencies.

Commercial banks that use lira assets as collateral instead of Eurobonds and gold will access cheaper central bank funding via 90-day repo auctions, the governor said, promising more details on the planned program later.