Turkey's annual inflation is expected to surge further in the coming months before dipping to nearly 43% by the end of the year, the central bank forecast on Thursday.
Inflation has surged since last fall amid soaring global commodity and energy prices and as the Turkish lira weakened after the central bank in September embarked on an easing cycle, which saw its policy rate being slashed by 5 percentage points.
Turkey’s annual inflation rose to 61.14% in March, a new 20-year high, amid a rise in global energy costs due to Russia's invasion of Ukraine.
It came despite tax cuts on basic goods and government subsidies for some electricity bills to ease the burden on household budgets.
The consumer price index (CPI) will peak at around 70% by June before declining to near 43% by year-end, according to the second quarterly inflation report of the Central Bank of the Republic of Turkey (CBRT).
Separately, a poll showed on Thursday that the rate is expected to rise to 68% in April due to the impact of the Russia-Ukraine conflict and rising commodity prices.
Governor Şahap Kavcıoğlu made the forecast of inflation peaking at around 70% before June in a presentation on Thursday, adding it should fall to single digits by the end of 2024.
Disinflation will begin in the 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," Kavcıoğlu said.
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% three months ago. Its forecast for the end of 2022 stood at 11.8% in October.
The CBRT also sees a mid-point forecast of 12.9% for the end of 2023, up from 8.2%, Kavcıoğlu said. The bank predicted that inflation would fall to single digits and hit 8.3% in 2024. It targets a range of around 5%.
The upward revision was led by Turkish lira-denominated import prices and soaring food and energy costs.
The central bank estimates food inflation at 49% for the end of this year, and at 15% for 2023, increasing from its estimates in January of 24.2% and 10%, respectively.
Import prices are also expected to increase by 22.2% at the end of this year, before decreasing by 7% at the end of 2023.
The estimates were $102.2 and $93.9 for oil prices for the end of 2022 and 2023, respectively.
Kavcıoğlu said that in the first quarter of the year, the rise in global commodity prices, especially energy and food, were the main reasons for the rise in inflation.
In addition to the increase in import prices, the high level of transportation costs and supply problems continue to affect the inflation outlook negatively, he said.
He recalled that with the geopolitical developments that turned into a hot conflict at the end of February, international food prices, especially wheat and sunflower, reached historic highs.
In addition to geopolitical problems, China's tightening of pandemic measures limits recovery and keeps transportation costs at high levels, he added.
Kavcıoğlu stressed that inflation will decrease gradually with monetary policy and the restoration of global peace.
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, Kavcıoğlu said, adding that Turkey's economy saw expansion of 7% in the first quarter of this year.
Since the rate cuts, the central bank has kept the benchmark rate steady in four meetings this year.
Kavcıoğlu 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, Kavcıoğlu said.
The Turkish lira stood at 14.8150 at 10:56 a.m. GMT, slightly weaker than its close on Wednesday.
Kavcıoğlu 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.