Reuters / Istanbul
Turkey’s central bank ramped up its year-end annual inflation forecast to 23.2% from a previous 11.8%, but its chief dismissed the notion that a series of unorthodox interest rate cuts have sent inflation soaring and the lira tumbling.
When asked about the central bank’s independence at a news conference, governor Sahap Kavcioglu said the bank sets policy based on data. The central bank has slashed its policy rate by 500 basis points to 14% since September, setting off a crisis last month in which the lira touched a record of 18.4 versus the dollar before rebounding sharply.
The exchange-rate volatility helped send inflation soaring to 36% in December, and most analysts expect it to approach 50% in coming months before easing to about 27% by the end of the year, according to a Reuters poll.
But the central bank, which has consistently undershot actual inflation in the last few years, said inflation was heading lower and predicted a mid-point of 23.2% for the consumer price index at end-2022.
A chart shared by the bank showed it expects inflation to approach 50% in January, peak near 55% in May and then drop sharply in the third quarter, which Kavcioglu attributed to the government’s new economic strategy.
The bank also forecast 8.2% inflation for the end of 2023 and a return to its official target of 5% a year later.
Enver Erkan, chief economist at Tera Yatirim, said inflation risked outstripping the central bank’s forecast due to the volatility of food and energy prices.
President Recep Tayyip Erdogan, who has long held the unorthodox view that interest rates cause inflation, launched a new economic programme last year that prioritises low rates, exports, lending and investment.
Kavcioglu said that the central bank will support the new economic plan and that price stability will be achieved by increasing the share of the lira in the financial system.
He said the bank will review its policy tools and add new instruments in order to prioritise the local currency.
The bank “will take care of financial products and liquidity factors rather than the possibility of an increase in the main policy rate,” Tera’s Erkan said.
Kavcioglu said the lira crash in December had “nothing to do with the rate cuts” and would have happened irrespective, adding that much of the price pressure was down to global supply issues.
“We took care of the exchange rate, God willing we will take care of inflation too with these policies,” he said, calling on the banking sector to believe in disinflation and act accordingly.
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