Turkey's Central Bank Sticks To Forecast For Inflation Plunge

Turkey's central bank stuck to its forecasts for a sharp drop in inflation on Thursday, saying the increasing predictability of the lira's exchange rate plus financing support meant there was no longer the basis for large price rises.

Presenting a quarterly economic report, the bank's Governor Sahap Kavcioglu stood by previous year-end annual inflation forecasts for 2023 and 2024 of 22.3% and 8.8% respectively.

While most mainstream economists expect Turkey's inflation, which hit a 24-year high of 85% back in October and was 65% in December, to continue to cool in the coming months, they see it staying well above the central bank's projections.

The median estimate for inflation at end-2023 in the latest Reuters poll was 42.5%, for example, and 26.4% for 2024.

Kavcioglu, who has slashed interest rates from 19% to 9% over the last year, said data were confirming the slowdown and monthly rates were getting closer to historical averages too. Pricing behaviour should follow, he added.

"In an environment where cost shocks are fully reflected, predictability has increased in exchange rates, company profitability has improved and financing costs are supported, there is no basis for the continuation of high price increases," he said.

The central bank's forecasts also show oil prices at $80.8 in 2023, slightly above its $79.3 forecast three months ago.

"The fact they are continuing to show confidence that inflation will fall sharply does not surprise me," said Cristian Maggio Head of Emerging Markets Strategy at TD Securities in London.

"They are not trying to achieve their inflation target; they are trying to keep the lira stable and keep growth as buoyant as possible ahead of the elections in May," he said, noting the bank's 9% interest rate was still 55% below the current annual inflation rate.

President Tayyip Erdogan signalled last week that Turkey will hold elections on May 14, a month earlier than he had earlier flagged, setting the clock ticking on perhaps the most consequential vote in the century-long history of the republic.

Polls show the parliamentary and presidential elections will be tight, with an opposition alliance promising to roll back the country's current unorthodox economic policies.

GRAPHIC: Underestimating inflation Underestimating inflation -