Turkey's Central Bank Raises 2024 Inflation Forecast to 38%, Maintains Tight Monetary Policy

Key Takeaway

• Turkey's central bank raises 2024 inflation forecast to 38% from 36%, maintaining a tight monetary policy with the benchmark rate at 50%.
• The adjustment signals potential future interest rate movements and aims to boost investor confidence and market stability.
• Despite aggressive rate hikes, challenges like high inflation expectations and strong domestic demand continue to be closely monitored.

Inflation Forecast Adjustment

Turkey's central bank has revised its year-end inflation forecast to 38% for 2024, up from a previous estimate of 36%, while maintaining its 2025 forecast at 14%. This adjustment was announced by Governor Fatih Karahan during a quarterly presentation in Ankara, emphasizing the central bank's commitment to combating inflation with a tight monetary policy stance. Despite the increase, this forecast aligns more closely with economists' expectations but diverges from earlier central bank statements that deemed the 36% target for 2024 as "ambitious but attainable." Deputy Governor Cevdet Akcay had previously affirmed the feasibility of this target in February. The central bank's decision to adjust its forecast has sparked speculation about future interest rate movements, following a significant tightening cycle that saw the benchmark rate rise to 50% from 8.5% since last June.

Monetary Policy and Market Confidence

The central bank's steadfast approach to reducing inflation to 36% by the end of the year has been a focal point for investors, signaling a potential boost in confidence and market stability. Altug Ozaslan, CEO of Fortuna Capital, highlighted the importance of investors' faith in the monetary policy and the central bank's readiness for further liquidity tightening as crucial factors for attracting inflows into government bonds. This period of economic recalibration has seen Turkey adopt more conventional economic policies, with nine consecutive rate hikes and discussions on easing offshore currency swap restrictions to facilitate better hedging options against lira exposure and improve market liquidity.

Economic Adjustments and Expectations

Amidst an aggressive rate-hiking regime, Turkish officials have been keen to emphasize the real measure of policy tightness, considering the differential between borrowing costs and the projected path for inflation. This perspective suggests a tighter monetary stance than nominal rates imply. The central bank's updated inflation report is expected to coincide with a peak in price growth, with disinflation anticipated to set in due to the statistical base effect from 2023 and the cumulative impact of the rate hikes. However, challenges such as elevated inflation expectations and robust domestic demand persist, with the central bank and economists closely monitoring these factors.

Management Quotes

• Fatih Karahan, Governor of Turkey's Central Bank:

  "The central bank now projects inflation ending 2024 at 38%, from a previous forecast of 36%, and left next year’s estimate at 14%... will definitely not allow a permanent deterioration in the inflation outlook." "Officials see their forecasts as targets meant to shape policy while doing 'whatever it takes' to smother inflation." "The central bank is determined to maintain a tight monetary policy stance until inflation falls to levels consistent with the target."