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Turkish Inflation Forecast Skyrockets: Central Bank Raises Year-End Prediction from 22% to 58%

In a bold move, the President of the Central Bank of the Republic of Turkey (CBRT), Hafize Gaye Erkan, unveiled the third inflation report of the year, announcing a significant upward revision of the 2023 inflation forecast from 22.3% to 58%.

Interest Rate Hikes to Continue

During her debut presentation of the inflation report, the new CBRT President, Hafize Gaye Erkan, emphasized their primary goal of price stability. To achieve a sustained reduction in inflation, they have initiated a process of monetary tightening. The gradual reinforcement of monetary tightening will continue as deemed necessary. In addition to interest rate hikes, they have implemented selective credit and quantitative tightening measures, which will persist.

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Hafize Gaye Erkan

Temporary Surge in Inflation Expected

Erkan clarified that inflation is likely to experience a temporary surge in the short term. They are diligently creating the groundwork for the commencement of disinflation in 2024. The period beyond 2025 is anticipated as the beginning of a stable period, characterized by accelerated inflation decline and enhanced predictability.

Significant Contributions to Inflation Reduction

Notably, essential goods, food, and energy items have made the most substantial contributions to inflation reduction. The contribution of the service sector has remained relatively stable at around 15%. The robust performance of economic activities, especially domestic demand, has been influential. Despite this, total supply has shown a more moderate trajectory. They expect that the selective credit tightening measures will help balance domestic demand. The closure of output gaps will be a crucial element in the disinflation process. They predict a marked improvement in the current account balance in the second half of the year due to the effects of monetary tightening.

Rent Increases Impact Inflation

Exchange rate pass-through has been on the rise lately and currently stands at around 25%. The pass-through is swift during periods of strong demand conditions. The ongoing monetary tightening process will also support exchange rate stability.

Wage increases have led to cost increases, which will be reflected in prices within a few months. In the service sector, price increases continue at elevated levels. Rent increases are particularly influential on inflation. Breaking the inertia in inflation is contingent upon anchoring expectations. They are determined to continue employing all available tools until inflation reaches single digits.

Year-End Inflation Forecast Raised to 58%

Reserves have been experiencing a robust increase since June. Strengthening reserves have led to improved financing conditions and reduced exchange rate volatility.

The CBRT has made significant updates to its inflation path. They have raised the year-end inflation forecast to 58% (previously 22.3%) and set the forecast for 2024 at 33% (previously 8.8%). The 2025 year-end inflation forecast has been determined at 15%.

The focus of their monetary policy is to lower the core inflation trend. They will diversify the Turkish lira savings instruments that they have initiated work on and support the deepening of capital markets.

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