The Central Bank of the Republic of Türkiye (CBRT) Thursday revised its year-end inflation forecast upward for 2023, 2024 and 2025.
The annual consumer inflation is projected to hit 58% this year, revised 35.7 points up from the previous forecast of 22.3%, Governor Hafize Gaye Erkan told a meeting held to release the bank's third quarterly inflation report this year.
The end-2024 forecast was raised to 33% from the previous projection of 8.8% and the end-2025 forecast to 15% from 5%, Erkan noted in her first news conference.
The upward revisions were because of Turkish lira-denominated import prices, output gap, food prices, administered prices and unit labor cost and forecast deviation and change in forecasting approach.
"Compared to the previous reporting period, developments in lira-denominated import prices pushed our year-end inflation forecasts for 2023 and 2024 up by 7.5 and 8.3 points, respectively. This was mainly driven by exchange rate developments," Erkan explained.
Food prices added 8.5 percentage points for 2023 and 6.0 percentage points for 2024 to the bank's forecasts, she stressed.
"Changes made to other economic policies, such as transfers to households, taxes, wages and administered price adjustments, raised the end-2023 inflation forecast by 7.5 points and end-2024 inflation forecast up by 3.6 points."
The stronger-than-expected domestic demand pushed the year-end inflation forecasts up by 1.3 points for 2023 and by 0.4 points for 2024, Erkan noted.
"Lastly, the effects of forecast deviations and the change in forecasting approach added 10.9 and 5.9 points to our year-end forecasts for 2023 and 2024, respectively," she said.
While gradually raising the policy rate, the bank is committed to boosting the functionality of market mechanisms through the simplification process to enable market rates to become more aligned with inflation expectations, the governor said.
Erkan underlined the bank would continue to take stabilizing steps that target inflation through selective credit tightening and aims to ensure stable development in the Turkish lira liquidity without generating excessiveness in exchange rates and domestic demand.
"The central bank will make decisions based entirely on data and in complete coordination in line with the principles of confidence, stability and transparency," she said.
A week ago, the central bank raised its policy rate by 250 basis points to 17.5%, continuing to reverse low-rates policy but with a hike that was smaller than expected by markets.
That was the second meeting under Erkan, who is leading a change of course after the one-week repo rate was cut to 8.5% from 19% in 2021 despite soaring inflation. In her first meeting, the bank raised rates by 650 basis points.
Annual inflation fell to 38.21% in June, having peaked at a 24-year high of 85.5% in October last year. But economists have revised their year-end forecasts to as high as 60% due to the lira's continued decline and various tax hikes in July.
Piotr Matys, senior FX analyst in Polan's Touch Capital Markets, said, "Governor Erkan's public debut is an excellent opportunity to gain market credibility and convince investors, who so far have been disappointed with the pace of monetary policy tightening (at least the vast majority of them), that she is fully committed to bring inflation under control."
"Remarks from Governor Erkan imply that she wants to reduce staggeringly high inflation without causing structural damage to the real economy," he said.
Erkan on Thursday also said she foresees a significant improvement in the current account balance in the second half, with selective credit tightening measures balancing domestic demand.
Erkan said forex pass-through had increased in the near term but that interest rate hikes and quantitative tightening will support forex stability.
