Türkiye’s central bank raises year-end inflation forecast

Türkiye’s central bank nudged up its year-end inflation forecast to 38 per cent and governor Fatih Karahan said the apex lender would “do whatever it takes” to avoid any longer-term worsening of inflation as it maintains a tight policy stance.

Presenting a quarterly inflation report, Karahan said annual inflation – which climbed to 69.8 per cent in April – will peak this month at 75-76 per cent after which a disinflation trend would take hold alongside cooling domestic demand.

Central Bank of the Republic of Türkiye raised its mid-point consumer price inflation (CPI) forecast for end-2024 to 38 per cent from a previous 36 per cent. Its forecast for end-2025 remains unchanged at 14 per cent, while inflation is seen falling to 9 per cent by the end of 2026.

Karahan said the central bank had raised its year-end forecast due to an unexpected additional 4-percentage-point rise in the first four months of the year.

The bank has aggressively raised rates by 4,150 basis points since last June but it kept the policy rate unchanged at 50 per cent in April to allow its earlier monetary tightening, including a 500-point hike in March, to have an impact.

Karahan again pledged to tighten policy further if there is a significant deterioration in inflation, which has soared for years, prompting a lingering cost-of-living crisis for Turks.

Analysts have said the bank has probably ended its nearly year-long tightening cycle, which marked a stark turnaround after years of unorthodox economic policy under President Tayyip Erdogan, who in the past urged low rates despite rising prices.

A Reuters poll published last week showed inflation falling to 43.5 per cent by the end of 2024. Central bank deputy governor Cevdet Akcay said at Thursday’s event that under the policy programme it was not possible for inflation to end the year above 42 per cent.

Türkiye boosts reserves

Karahan, who took the bank’s reins in February, said leading indicators showed domestic demand was now following a more moderate trend than in the first quarter, and that the rate-hike cycle would cool demand more in the second half of the year.

At near 70 per cent, annual inflation is already the highest since late 2022.

As it seeks to cool off the economy, the bank is also rebuilding foreign reserves which had plunged under previous economic programmes that had sought to stabilise the lira.

Net foreign reserves climbed by a record $7bn last week, according to bankers, sustaining a strong turnaround. Net reserves excluding swaps rose to minus $39bn last week, bankers said, up from a record low of minus $65.5bn on March 29, just before local elections.

Asked about the central bank’s reserve plans on Wednesday, Isbank CEO Hakan Aran said: “They have a game plan. They have a plan to bring net reserves (excluding swaps) to zero and increase the gross reserves to the level of $200bn.”

Karahan said there is no target for reserves or the exchange rate.

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