CBRT foresees single digit inflation despite concerns

Although some concerns persist, Turkey’s central bank does not expect inertia in inflation and sees it falling along with a drop in commodity and energy prices, its governor said Thursday.

Addressing a meeting with investors, Şahap Kavcıoğlu also said the bank is monitoring risks to the current account balance due to soaring energy prices amid the conflict in Ukraine, two meeting participants said.

The government has been endorsing a new economic program based on low interest rates, higher production and exports to achieve a current account surplus.

Yet the plan faces pressure due to rising commodity prices and possible fallout for tourism revenues due to the war.

In a call with investors and economists, Kavcıoğlu said risks to tourism income stemming from the conflict could be managed, the meeting participants told Reuters.

Before Russia’s invasion of Ukraine a month ago, people from those countries constituted some 30% of foreign arrivals to Turkey, while they were also major trade and defense partners.

Since then, Turkey’s exports to Russia have halved and those to Ukraine have ceased, a central bank official said on the call.

According to the participants, the Central Bank of the Republic of Turkey (CBRT) Deputy Governor Mustafa Duman said new inflation forecasts will be included in the bank’s scheduled report in April, and that inflation is seen back down near single digits next year.

Turkey’s annual consumer price index (CPI) jumped more than expected to a two-decade high of 54.4% in February.

In its January report, the central bank forecast inflation to fall to 23.2% at the end of this year while it also estimated it to fall to 8.2% by the end-2023 with the impact of the monetary and fiscal steps prioritizing the Turkish lira.

The lira has held steady in recent sessions after depreciating when Russia first invaded Ukraine. It has declined 11% this year after sliding 44% in 2021.

It traded at around 14.85 against the dollar following the call, little changed from its close on Wednesday.

Higher commodity prices in Turkey due to its near-total reliance on imports to meet its needs is one of the main constraints on the economy.

Kavcıoğlu also said that although the central bank has some concern over rising inflation, it does not think inflation inertia will occur and believes it will fall with positive developments in commodity prices, according to participants.

Last week, the central bank, kept its policy rate on hold at 14% for a third consecutive month and said disinflation should begin in part due to base effects and the resolution of the conflict.