(Bloomberg) -- Turkey’s central bank raised its inflation forecasts for this year and through 2026, bringing them closer to market expectations after price gains exceeded estimates for two consecutive months.
The latest outlook shows officials see inflation finishing this year at 44% and then reaching 21% by the end of 2025, up from their previous estimates of 38% and 14%, respectively. The revision, “though not ideal, is not a serious deviation” and the bank expects price growth at 38% in March, Governor Fatih Karahan said Friday in the capital Ankara.
The forecasts amount to short-term goals for the monetary authority as it tries to achieve the official target of 5% in the longer term.
Karahan, a former New York Fed economist and policy adviser, appeared to be optimistic on the slowing levels of domestic demand as well as improvement in services inflation, which has been particularly sticky. Rent prices, the main reason of that stickiness, is seen slowing in the fourth quarter, he said.
By contrast, inflation expectations — a key pillar of the central bank’s policy — are not at the “desired levels,” according to the governor.
During a question-and-answer session following his presentation, the governor refrained from providing any specific guidance on the timing of possible interest-rate cuts. However, the central bank’s sizable revisions to the forecasts don’t imply a change in its policy stance in either direction, he said.
Any future cut in the bank’s key rate won’t result in looser monetary policy since it would only follow improvements in the main trend of inflation, Karahan said.
Still, in the view of markets and some economists, the governor’s comments could imply that a rate-cutting cycle could begin before the end of this year. As he spoke, Turkey’s main equity index Borsa Istanbul 100 extended gains to 2%, driven higher by a surge in bank stocks. The lira was trading 0.4% weaker at 34.36 per dollar as of 2:06 p.m. in Istanbul.
What Bloomberg Economics Says...
“We currently expect the recent improvement in inflation expectations, as well as our projection for a significant easing of the underlying inflation trend in November, to set the scene for the central bank to kick off a long-drawn easing cycle in December. Our baseline sees the policy rate at 47.5% by end-2024 and 25% by end-2025, down from the current 50%.”
— Selva Bahar Baziki, economist. Click here to read more.
The Monetary Policy Committee’s next two meetings are scheduled for Nov. 21 and Dec. 26.
“The stock market seems to be perceiving the Turkish central bank governor’s comments as an implicit signal of the rate cutting cycle to begin in December or January,” Strateji Portfoy’s Burak Cetinceker said.
Shortly after Karahan’s presentation, local media widely reported President Recep Tayyip Erdogan’s comments that “interest rates will fall together with inflation.”
The president, who’s held sway over monetary policy in recent years, in the past favored economic growth over price stability and removed central bankers who didn’t toe the line.
After pursuing an ultra-low rates policy in the runup to the national elections in May last year, Erdogan overhauled his economy management and installed market-friendly technocrats to rein in an inflation crisis caused by cheap money.
“You know my approach,” Erdogan told journalists on his return from Hungary, likely suggesting his unconventional views that inflation falls when borrowing costs are reduced.
Under the new management, the central bank has raised rates to 50% from single digits in less than a year. Annual inflation slowed to just under 49% last month.
--With assistance from Tugce Ozsoy, Baris Balci, Patrick Sykes and Firat Kozok.
(Updates throughout starting in first paragraph.)
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