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Turkey hikes inflation view on path to policy orthodoxy


Turkish President Recep Tayyip Erdogan speaks during the launch of Medium Term Programme at the Presidential Complex in Ankara, Turkiye on September 06, 2023.

Anadolu Agency | Anadolu Agency | Getty Images

Turkey jacked up its inflation expectations and cut that of economic growth on Wednesday, as it seeks to take a more orthodox and realistic policy path that analysts say could eventually test the patience of President Tayyip Erdogan.

Presenting the new forecasts, Erdogan said that tight monetary policy would lower inflation to single digits, adding Turkey will not compromise on economic expansion as policies are adjusted.

The government sees annual inflation of 65% at year end and 33% next year, up from 24.9% and 13.8% respectively in forecasts it published a year ago.

It trimmed GDP growth forecasts to 4.4% this year and 4% next year, which is still higher than most economists expect, from 5% and 5.5% previously.

The current account deficit is expected to be $42.5 billion in 2023 and $34.7 billion in 2024.  

Officials unveiled the forecasts in the annual “medium-term programme”, seen as a milestone in a broader policy U-turn that began in June and is meant to rein in inflation expectations that have soared for years.

After his May re-election, Erdogan – faced with deep economic strains and badly depleted forex reserves – named a new cabinet and central bank chief to undertake aggressive interest rate hikes and begin freeing up credit and forex markets.

The lira has since shed 25% to the dollar and annual inflation jumped to near 59% last month.

The economy is expected to slow through year-end – and ahead of nationwide municipal elections set for March next year – as stimulus tied to the May elections fades and as the policy rate hikes, to 25% from 8.5%, start to weigh.

A Reuters poll last month showed expectations of 2.9% full-year growth, lower than trend in the emerging market economy that seeks to reverse a years-long exodus of foreign investors.

With Erdogan’s ruling AK Party seeking to reclaim big cities Istanbul and Ankara from the opposition in the March vote, some analysts say higher inflation and unemployment and lower growth could test the president’s patience with the U-turn.

Erdogan has fired four central bank governors in four years. His push to slash rates despite rising prices led to a historic currency crash in late 2021 and sent inflation above 85% last year.

“The risk is ever-present that…Erdogan could lose patience,” said Commerzbank analyst Tatha Ghose. Inflation will “be very high for an extended period of time, which will trigger second-round effects such as wage settlements.”

The central bank has said inflation will likely rise to near 62% by year end, the upper bound of its earlier forecast, despite a more aggressive-than-expected 750-point rate hike in August.

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