Turkish policymakers have recently adjusted their inflation forecasts upward as the end of the year approaches, signaling growing concerns about economic stability. The Central Bank of Turkey (CBT) recently forecasted a year on year inflation rate of 23.3%. Moreover, they predict that 24-month ahead inflation will average 17.4%. First, market participants have raised their inflation expectations. The new estimate is currently at 29.9%, up significantly from last month.
We anticipate the CBT will follow the trend of recent cuts, with a currently projected 39.0% interest rate. By December, this rate is expected to fall to 37.7%. What is particularly troubling is that these decisions are made within the context of continuing inflationary pressures. These pressures are exacerbated by a number of factors, particularly the continued sinking of the Turkish lira, now at an annual rate of 40% against the USD and EUR. This inflation is worsened by the depreciation, putting even more pressure on consumers and businesses.
New finance minister Mehmet Simsek has already signaled that he is forecasting inflation to close the year around 30%. The CBT’s upper forecast bound is set at 29.0%, highlighting the agency’s acknowledgment of the challenging economic environment. Simsek and other policymakers attribute some of the inflationary pressures to temporary factors, such as frost and other one-off occurrences affecting food prices.
Yet even with these challenges, the economic policy team is wary about keeping interest rates high for too long. They believe shared President Tayyip Erdogan’s patience with orthodox monetary policy may be wearing thin. He could act if interest rates fail to raise, commensurate with our new economic reality.
It appears that the CBT is trying to lower rates due to these pressures, but it doesn’t have other options. They’re in a difficult position of trying to control inflation while keeping the economy strong. The medium-term forecasts continue to point to a gradual easing back to the inflation target, but the road ahead is very unclear.
“Typically, the answer to this question is ‘no’” – an unnamed source in the economic policy team.