Turkey’s central bank on Thursday raised its year-end annual forecast for consumer prices as inflation driven by the impact of the Ukraine war and soaring commodity costs runs at a 24-year high.
The Central Bank of the Republic of Turkey (CBRT) predicts that inflation – which soared to nearly 79% in June – will reach 60.4% by the end of 2022, up from its 42.8% forecast three months ago.
That is according to the monetary authority’s quarterly inflation report. The bank cited rising costs of imports and the impact of a weak Turkish lira and said it sees consumer inflation gradually falling to single digits in two years.
Addressing a news conference in Ankara, Governor Şahap Kavcıoğlu said inflation would slow to 19.2% toward the end of next year before reaching 8.8% in 2024. The bank’s previous estimate for 2023 was 12.9%.
Turkey’s consumer price index has surged since last autumn as the lira weakened after the central bank in September embarked on a 500 basis-point easing cycle.
Last month’s inflation was the highest reading since September 1998, driven by soaring energy and food costs.
Core inflation shows positive outlook
The consumer price index (CPI) remained above the foreseen trend in June but core inflation showed a more positive outlook, Kavcıoğlu said.
The bank’s quarterly presentation showed the estimated range of annual inflation reaching nearly 90% in the autumn before easing. It sees food inflation at 71.3% by the end of the year, versus its earlier estimate of 49%.
Kavcıoğlu said the contribution of demand in lowering inflation will become more significant in the second half of this year.
The central bank held its key policy rate unchanged at 14% for a seventh straight month last week, as it emphasized its expectation that the disinflation trend was expected to begin.
"With the decisions we take, we aim for a permanent decrease in inflation as soon as possible. We have used and will continue to use our tools effectively with a liraization perspective," Kavcıoğlu said.
President Recep Tayyip Erdoğan has vowed that his government would continue lowering interest rates rather than increasing them.
Erdoğan is known for his opposition to higher borrowing costs, which he says only makes "the rich richer and the poor poorer."
The government has been affirming its commitment to boosting production, exports and employment with a low-rates policy, and has promised a current account surplus that is said to eventually steady the lira and cool inflation.
Erdoğan has said Turkey would be relieved of the burden caused by inflation and will leave behind its problems from February-March next year.
Upbeat on current account
The central bank will continue to take steps to manage any extraordinary developments in commercial and consumer loans, which have cooled recently, Kavcıoğlu said.
He was also upbeat on the current account deficit, which has risen this year. The balance will turn around, he said, once global commodity prices normalize, helped by the tourism revenues that have far exceeded expectations.
"When global commodity prices start to normalize, our economy will have reached the capacity to run a current account surplus and export-led growth in which the need for short-term financing is minimized," the governor said.
Strong demand, manufacturing and exports helped Turkey post better-than-expected 7.3% annual economic growth in the first quarter. It bounced back from COVID-19 to grow 11% in 2021 and was one of the few countries to expand in 2020.
‘No talk of recession’
Kavcıoğlu said Turkey is the only country in the world where "there is no talk of recession," underlining how the International Monetary Fund (IMF) this week cut its global growth forecasts.
Compared to most economies that have had their growth forecasts lowered, the IMF lifted its 2022 prediction for Turkey to 4%, up from 2.7% three months ago. It sees the economy growing 3.5% in 2023, versus a forecast of 3% issued in April.
The fund warned that downside risks from high inflation and the Ukraine war were materializing and could push the world economy to the brink of recession if left unchecked.
Kavcıoğlu said investment expenditures continue in a healthy and sustainable manner, spearheaded by the steady growth in machinery investments.
"While domestic demand remained almost flat in the second quarter, industrial production remained strong with the impact of foreign demand," he said. "The increase observed in industrial production spread throughout the manufacturing industry. Strong economic growth is also reflected in capacity utilization rates."