The central bank of Turkey has revealed that it remains committed to following a strategic plan to establish the conditions for achieving sustainable disinflation in 2024. On Monday, the head of the monetary authority stated that they are undertaking measured and resolute measures to achieve this objective.
Despite a notable reduction in Turkey’s annual inflation to around 38.21% in June, it experienced an upward surge to nearly 48% in the previous month. This escalation can be attributed to the depreciation of the Turkish lira and recent tax increases. Officials acknowledge that inflation is expected to climb further towards the end of 2023.
Turkey’s central bank tightening policy rate
Last month, the central bank of Turkey significantly revised its forecast, doubling its expectations for the consumer price index (CPI) to reach 58% by the year-end. This projection was a significant increase from its previous inflation report in March, which had predicted an inflation rate of 22.3% for the same period.
Hafize Gaye Erkan, the Governor of the Central Bank of the Republic of Turkey (CBRT), emphasized the institution’s commitment to implementing a roadmap to ensure the commencement of sustainable disinflation in 2024. She noted that the central bank is taking gradual and resolute steps toward this goal, aligning with the strategy shared in the Inflation Report meeting.
Erkan’s statements followed a surprising move by the central bank the previous week, raising its benchmark policy rate by an unexpectedly substantial 750 basis points, bringing it to 25%. It demonstrated a renewed determination to address the escalating inflation as part of a broader shift in policy.
As part of this policy shift, the central bank has incrementally raised its one-week repo rate by a cumulative 1,650 basis points since June, lifting it from 8.5%. The recent decision maintained the policy rate at its highest level since 2019, leading to the lira strengthening to levels not seen since mid-July.
The central bank’s policy committee declared its intention to tighten the policy rate further “as much as needed in a timely and gradual manner” to mitigate inflation. Meanwhile, JPMorgan forecasted that the policy rate could reach 35% by the end of the year.
The central bank also acknowledged that rising oil prices and deteriorating expectations indicate that inflation will likely approach the upper boundary of its projections by the end of the year. Nevertheless, the bank expressed confidence that disinflation will be established by 2024.
Turkey’s working on stabilizing the economy
Beyond the monetary tightening measures, there have been additional indications of enduring changes within Turkey’s economic landscape. Authorities have raised taxes, tempering domestic demand to manage budget deficits. Furthermore, foreign exchange reserves have been bolstered by approximately $20 billion (531.32 billion Turkish lira), aiming to prevent any potential crisis related to the current account deficit.
The central bank has embarked on a targeted approach to tighten credit availability. It has initiated the gradual withdrawal of a deposit scheme that provided foreign exchange protection for lira deposits, guarding them against forex depreciation.
Top officials in Turkey are preparing to unveil an extensive economic program next month to mitigate uncertainties. The forthcoming program will outline a transition towards greater economic and financial predictability. It will also encompass three-year macro forecasts.
Mehmet Şimşek, the treasury and finance minister, is scheduled to launch this investor roadshow on September 19 at the headquarters of Goldman Sachs in New York, as reported by Reuters. Following meetings in New York and the United Nations, where President Recep Tayyip Erdoğan is also slated to be present, Şimşek has outlined plans for visits to London and participation in an event by the International Monetary Fund (IMF) in Morocco. Additional meetings are scheduled in Japan, Singapore, and Hong Kong by the year’s end.
