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Turkey gets to rewrite inflation forecasts again after rate cuts: report

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Turkey’s central bank is likely to raise its year-end inflation projection following a round of unorthodox interest-rate cuts that have sent prices higher — but few are likely to take it seriously, Bloomberg reported.

Once a key highlight on Turkey’s economic calendar, the quarterly inflation report has been rendered insignificant because the bank has repeatedly painted an overly rosy picture.

On Thursday, Governor Şahap Kavcıoğlu is expected to revise the base-case scenario for consumer prices for the next two years, even as he moves toward cutting rates into single digits next month amid President Recep Tayyip Erdoğan’s push for extremely low borrowing costs.

“The bank’s projections have no chance of holding up,” said Şenol Babuşçu, a professor of finance and banking at Başkent University in Ankara, adding that he expects its year-end inflation estimate to rise to around 70 percent, below his own forecast of around 80 percent.

The bank’s last report in July predicted inflation will end the year at 60.4 percent, much lower than economists’ expectations. Bloomberg Economics calculated at the time that year-end inflation would be 69 percent and now sees it at 75 percent.

“The central bank’s track record points to an underestimation of inflation by 13 percent in recent years and by 10 percent in the longer term. Taking this bias into account suggests a likely forecast range of 65 percent-68 percent, up from the 60.4 percent forecast made in July but still well-below our estimates. Base effects should help price gains to fall from their 24-year peak, but not as fast as authorities expect,” said economist Selva Bahar Baziki.

Turkey has pushed to grow the economy by capitalizing on a weak lira to make its exports more attractive, but its policy mix has done little to achieve price stability. The lira has lost nearly 50 percent of its value against the dollar in the last year.

The depreciation is prompting consumers to front-load purchases and flock to hard currencies to protect their savings, leading to a vicious inflationary cycle.

Kavcıoğlu has placed the blame for price increases on the “delayed and indirect effects of rising energy costs” following Russia’s invasion of Ukraine in February. He said inflationary pressures would subside once “a global peace environment is achieved.”

In place of an orthodox policy, the bank has relied on fringe and indirect measures to manage loan growth and promote the wider use of the local currency.

“It is not just the inflation report that has become insignificant, the central bank itself has also become insignificant,” said Babuşçu.

 

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