Turkey news: Inflation to end year at 42.8 percent as lira continues to struggle | City & Business | Finance


The central bank now predicts inflation to stand at 42.8 percent by the end of the year, having hit a 20 year high of 61 percent last month. The forecast is a considerable upgrade from the bank’s previous prediction of 2022 ending with inflation at 23.2 percent. Russia’s invasion of Ukraine and new Covid variants were blamed by the bank as factors with energy and food prices, in particular, being pushed up due to reliance on Russia for exports. The bank said: “The recovery in global demand, the high course of commodity prices, supply constraints becoming more evident in some sectors, particularly in the energy sector, and the elevated level of transportation costs lead to an increase in producer and consumer prices on a global scale.

“Central banks of advanced economies consider that inflation may continue to increase for a longer period than expected due to rising energy prices and the supply-demand mismatch.”

According to the bank’s governor Sahap Kavcioglu food prices are now expected to rise 49 percent for the year, up from a previously predicted 24.2 percent.

Record energy prices have also weighed on Turkey, widening its foreign trade deficit, as the Ukraine conflict pushes oil well past the $100 a barrel threshold.

Turkey’s economy has also been beset by a considerable depreciation in its currency, the lira, which fell rapidly during 2021 following a string of interest rate cuts.

While many central banks have begun raising interest rates to head off persistent inflation, Turkey has been constrained by strong opposition to any rate hike from President Tayyip Erdogan.

In opposition to most mainstream economics Mr Erdogan believes interest rates in fact cause inflation, branding them “the devil” and vowing to oppose any increase.

The president wields considerable influence over the central bank which is now on its fourth governor in five years.

Following successive cuts to interest rates last year the bank has recently kept them steady and has instead focused on a strategy of guaranteeing bank deposits to encourage Turks to keep their money in liras and prevent a sell off for safer currencies such as the dollar.

As a result of this “liraization strategy” the bank says “the stable course of the Turkish lira in the first quarter averted a more negative outlook on inflation.”

Throughout 2022 so far the lira has continued to decline, falling from 13.32 to the dollar at the start of the year to 14.81.

However this marks some stability from the rapid loses of 2021 which saw it halve in value at its lowest point.

Turkey has remained committed to using its liarization strategy rather than any further changes to interest rates with the bank’s most recent meeting agreeing to hold at 14 percent.

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Analysts however remain unconvinced as to how sustainable this policy will prove though.

Ima Sammani, FX Market Analyst at Monex Europe, noted: “For now, it doesn’t look like policymakers are set to reverse course, which means that as long as the war in Ukraine weighs on inflation expectations globally via commodities and supply chains, policy is set to be left unchanged.

“Turkey’s government may lean more heavily on unconventional policy tools to shore up the FX rate and bolster currency reserves, however, if history is any guide, these measures only provide temporary relief to the Turkish lira.”



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