‘Best’ or ‘unrealistic’? Turkish central bank releases inflation report

The Central Bank of the Republic of Türkiye (CBRT) recently unveiled its “2024-III Inflation Report,” with Governor Fatih Karahan outlining inflation expectations.

Key projections include a year-end inflation rate of 38% for 2024, with a gradual decrease to 14% by the end of 2025 and further down to 9% by 2026. The report anticipates inflation stabilizing at the CBRT’s mid-term target of 5%.

Inflation projections

• 2024 year-end inflation: Expected to be 38% (unchanged from the previous forecast).
• 2025 year-end inflation: Expected to be 14% (unchanged from previous forecast).
• 2026 year-end inflation: Expected to be 9% (unchanged from the previous forecast).
• Mid-term target: Inflation expected to stabilize at 5%.

Karahan emphasized that the tight monetary policy stance would persist until price stability is achieved, predicting a steady decline in inflation throughout the year. Seasonal adjustments suggest average monthly inflation rates will dip to around 2.5% in third quarter and slightly below 1.5% in fourth quarter.

‘The best inflation report’ or ‘unrealistic inflation target’

The report drew mixed reactions from economists and analysts, with some praising the CBRT’s approach and others expressing skepticism about the feasibility of the targets.

• Mega impressive: Strategist Timothy Ash praised the presentation as “mega impressive,” highlighting a “night and day” improvement compared to previous management. He described the CBRT as making a credible return as one of the most reliable central banks in emerging markets. However, Ash noted the challenges ahead, stating that delivering lower inflation would not be easy given past mistakes.
• Detailed technical report: Professor Hakan Kara found the technical content of the report satisfying and detailed. However, he criticized the inflation forecast, noting that the year-end inflation range of 34%-42% seemed unchanged to avoid disrupting expectations, weakening the report’s credibility.
• Inflation test: Dr. Inanc Sozer questioned the CBRT’s adherence to the legally mandated 5% inflation target, especially with the wide range of the current forecast. He voiced concerns about the target’s credibility.
• Best report in a decade: Murat Aysan, fund manager, praised the CBRT’s presentation as the best inflation report in a decade, commending the bank’s determination to meet its targets, particularly in light of recent rate hikes before local elections. He noted rapid improvements in the CBRT’s balance sheet and foreign exchange position, adding that if the CBRT maintains its current policy stance and limits currency depreciation, the 40% inflation target is achievable. However, he warned that while some sectors may bear the costs, inflation impacts the entire country.
• Unrealistic inflation target: Economist Guldem Atabay expressed concerns over the 2025 inflation target of 14%, particularly its potential impact on wage adjustments, hoping the CBRT would not need to revise this target upward in the future.
• Imbalance between wage and consumption: Professor Serap Durusoy was skeptical about Karahan’s comments on demand for food and clothing, arguing that wages have not kept pace with inflation, making even stagnant demand seem optimistic.
• TurkStat and CBRT: Orkun Godek, deputy general manager of Deniz Investment welcomed the CBRT’s announcement of a committee established with TurkStat, emphasizing the importance of this development in addressing long-standing issues.
• Unwavering stance on forecast: Dr. Ali Cufadar, TEPAV Macro Economy Program director, pointed out the shift from inflation estimates to firm targets, noting that the CBRT’s unwavering stance on the 2024 forecast indicated a commitment to policy actions that would meet these targets, despite potential market skepticism.
• High unemployment: Economist Omer Rifat Gencal expressed concerns about the broader economic outlook, suggesting that Türkiye could be facing a significant contraction and unemployment, given the CBRT’s decision to maintain high policy rates and its consistent inflation expectations.
• Optimistic inflation targets: Prof. Dr. Cem Cakmakli, Koc University, found the CBRT’s inflation targets optimistic, especially given the increasing output gap forecast, but noted improvements in market expectations and pricing.