Turkey awaits inflation

According to Bloomberg, Turkey is set to raise inflation forecasts after consumer prices surged to nearly three times its initial estimate, with the central bank doubling down on a cheap borrowing policy that’s left it out of step with the global economy. 

In the second inflation report of the year, Governor Sahap Kavcioglu will update the bank’s base-case scenario for prices through the rest of 2022 and the next two years, and answer questions from economists and reporters in Ankara. New projections would typically give investors clues on the central bank’s path but they’re giving less weight to official data as monetary policy has become more closely tethered to President Recep Tayyip Erdogan’s political goals. 

While central banks around the world raise interest rates to combat inflation exacerbated by Russia’s special operation in Ukraine and global supply-chain disruptions, Turkey has gone in the other direction. The central bank has held rates for four consecutive months this year after a cycle of aggressive cuts in late 2021 that battered the lira and pushed inflation to a 20-year high.

Instead, Turkey has introduced a series of unconventional policies to attract hard currency and boost the central bank’s reserves. That’s helped stabilize the lira, which has weakened only 0.7% against the dollar since the U.S. Federal Reserve’s first hike of the year in March. But the approach has done little to combat inflation, which now exceeds an annual 60%. 

The Monetary Policy Committee, which is headed by Kavcioglu, is counting on a quick resolution to the conflict in Ukraine and receding base effects to bring down inflation before year-end. That outlook has been met with skepticism by economists. “It’s not reasonable to count on base effects when the headline CPI remains high for longer, at a time when we don’t see strong anchoring of inflation expectations,” said Emre Akcakmak, senior consultant to East Capital International in Dubai.

In its January report, the central bank predicted that consumer-price growth would end 2022 at 23.2%. The previous estimate was made before Russia’s special operation in Ukraine, which has led to a surge in the cost of commodities. Brent crude is trading at over $100 a barrel, well above the central bank’s current prediction of $80.4 a barrel. Food inflation, another major component of the central bank’s medium-term forecast, soared to 70.3% in March, compared with its current year-end forecast of 24.2%.  

The statistics agency will publish April inflation data on May 5. The next rate-setting meeting will be held on May 26.