Türkiye’s central bank on Thursday revised its year-end inflation forecasts upward for this year and the next, and vowed to continue gradual monetary tightening.
"Getting high and volatile inflation under control will be a long and difficult process. We will continue to use all tools available in a determined way to ensure disinflation," Central Bank of the Republic of Türkiye (CBRT) Governor Hafize Gaye Erkan told a news conference to unveil the last quarterly inflation report of the year.
The bank expects the consumer price index (CPI) to end this year at 65%, up from its estimate of 58% in the inflation report three months ago. Erkan said the inflation rate would fluctuate between 62% and 68% through the end of 2023.
This revision was mainly led by higher food and energy import prices this year, she stressed.
The inflation rose to 61.53% in the 12 months leading up to September, the highest level this year.
It hit a 24-year peak of 85% last year and surged again in recent months as the Turkish lira weakened amid a long easing cycle that has been reversed by the new economy administration appointed after the May elections.
Since Erkan was appointed governor in June, the bank has aggressively tightened policy, raising interest rates by 2,650 basis points as part of a wider policy shift toward more conventional policymaking.
"We are aware that we will make the greatest contribution to social welfare by providing price stability. Therefore, through the strong monetary tightening we initiated in June, we are steadfastly combating inflation," she stressed.
The forecast for 2024 has been lifted to 36%, up from 33% that the bank predicted in its previous report.
The estimates match those unveiled in the government's medium-term program in early September. The new road map is centered around structural reforms, reining in price increases through tight monetary policy and eventually ensuring sustainable economic growth.
Erkan said Thursday that disinflation would start after it peaked at around 70%-75% in May and that monetary tightening would continue until there was a visible improvement in inflation.
"Our policy is effectively influencing financial conditions, including interest rates, loans, deposits and foreign exchange markets, as well as domestic and external financing and reserves," she noted.
"The broad-ranging effects of monetary tightening on the economy unfold over time."
Regarding the process of balancing domestic demand, Erkan indicated that they were already receiving "some preliminary signals."
"As the cumulative effects of monetary policy come into play during this transitional period, we aim for the disinflation process to begin in the second half of 2024," she noted.
While Erkan acknowledged a slowdown in the monthly readings, she cautioned against premature optimism about significant improvements in the inflation outlook.
"Pretty consistent message being sent now from the CBRT," said Timothy Ash, senior strategist at BlueBay Asset Management.
"Trust us, we are tightening and more should happen after the local elections. And inflation should get down to a 30% handle by the end of 2024," he said of the bank's message.
The bank cut its forecast for 2025 to 14%, down from its earlier estimate of 15%. The government expects it to fall to 15.2% in 2025, before dipping further to 8.5% by the end of 2026.
The lira traded at 28.3460 at 9:21 a.m. GMT, little changed on the day. It has weakened some 33% this year.
"The outlook has changed a lot for the positive in terms of economic and monetary policy ... inflation is expected to remain very high for some time and rate hikes will continue unless something unexpected happens," said Minna Emilia Kuusisto, chief analyst at Danske Bank.
The central bank raised its policy rate by 500 basis points to 35% on Thursday last week, tightening aggressively for a third straight month as it steps up efforts to rein in inflation.
Erkan said the rise in inflation was driven by large shocks happening simultaneously, such as a surge in fuel prices, a hike in the currency basket and tax adjustments to meet the financial needs caused by the Feb. 6 earthquakes.
She stressed their inflation impact was largely completed, adding that the bank maintained a 5% medium-term target.
She also stressed that the central bank's gross international assets have risen $28 billion compared to the end of May, to surpass $126 billion as of Oct. 20, thanks to the new administration's steps.