By Year’s End, According To The Turkish Central Bank, Inflation Will Have Nearly Doubled

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The new central bank governor, Hafize Gaye Erkan, recently released her first inflation report and updated inflation forecasts.

During her first press conference, she answered questions about the report.

In the report, Erkan increased the central bank’s forecast for end-2023 official inflation to 58%, up from 22% in May.

The upper boundary has also been moved to 62% from 27%. The central bank expects official inflation to peak just below 70% in May 2024.

The report attributes the significant hike in inflation forecast to factors such as lira depreciation, wage and tax hikes, demand conditions, food prices, and the change in the central bank’s forecasting approach.

The assumption behind the guidance is that the lira won’t experience another crash. However, the USD/TRY continues to hit record highs, with TRY27.22 registered on July 19.

Upcoming levels on the USD/TRY chart are TRY28 and TRY30. The central bank will release its next inflation report and updated inflation forecasts on November 2.

Many consider the “change in the central bank’s forecasting approach” a positive step towards rationality in policy. However, the policy rate remains at 17.5%, despite the expectation of inflation peaking at 70%. Erkan defends her “gradual” approach to rate hikes, rejecting claims of political influence.

She explains that all central banks around the world, including the Fed, apply a gradual approach to monetary policy. Unfortunately, some central banks cannot print hard currencies.

Erkan has expressed frustration with the complex macro- and micro-prudential measures, as well as non-capital controls, in Turkey. She reports there are over one hundred such measures, making it difficult for even bank treasury departments to keep up with them.

The governor herself has struggled to keep track of the measures, but despite her complaints, she continues to rely on them as she gradually implements rate hikes.

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