Turkey’s apex bank says inflation to hit 58%

Hafize Gaye Erkan, the new governor of Turkey’s central bank, stated during her inaugural news conference on Thursday that the bank expects inflation to surge to 58% by the end of 2023. This forecast is more than double the 22.3% prediction outlined in the bank’s last inflation report just three months ago.

Erkan attributed the higher forecast to various factors, including exchange rate fluctuations, changes in economic policy, stronger-than-expected domestic demand, and a new approach to forecasting.

Her appointment to the central bank on June 9, along with a new Turkish finance minister, led analysts to speculate that a shift in monetary policy might be on the horizon. Their expectations were met later in the month when the central bank nearly doubled its key interest rate from 8.5% to 15%, the first hike since March 2021. Subsequently, there was a 250 basis point increase in July, though it fell slightly below expectations.

Inflation has been a significant concern for the Turkish economy, with rates soaring to staggering levels, reaching up to 85%. In June, inflation stood at 38.2% on an annual basis and 3.9% month-on-month. During her press conference, Erkan predicted that food inflation could surpass 60% by the end of the year.

The central bank also revised its inflation forecasts for the coming years, with predictions of 33% for the end of 2024 and 15% for the following year.

Erkan outlined the central bank’s strategy, stating, “Through decisions on quantitative tightening, we will ensure a stable development in the Turkish lira liquidity without generating excessiveness in exchange rates and domestic demand.” She emphasised the importance of continuously evaluating the impact of their decisions on inflation, markets, and financial conditions.

Over the past 18 months, the Turkish lira has experienced numerous record lows as traders reacted to the country’s relatively low interest rates, while most other major central banks globally have pursued monetary tightening programs. Erkan’s commitment to restoring expectations and predictability indicates a significant challenge ahead for Turkey’s economy as it grapples with surging inflation and economic uncertainty.