Turkey Raises Inflation Forecast, Closing Gap With Markets

(Bloomberg) — Turkey’s central bank moved its year-end forecast closer to market expectations and admitted to a “partial failure” on inflation in a rare instance of self-criticism.

Governor Fatih Karahan unveiled the monetary authority’s revised year-end inflation projection of 28%, up from its previous call of 26%, at a presentation in Istanbul on Thursday. Markets expect a challenging outlook ahead and forecast year-end annual price increases of 29%, according to a central bank survey last month.

He said geopolitical uncertainty stemming from the conflict as well as volatility in oil, gas and food prices pushed the monetary authority’s forecast upward, while conceding that the bank’s past forecast missed the mark.

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“There is a very serious global price rise driven by energy supply issues,” Karahan said. As a major oil importer, Turkey faces additional inflationary pressure from the elevation in global energy prices driven by the Iran war.

“On the one hand, the fact that inflation was kept in check at 75% and later brought down to the 30s is a success,” he said, referring to a yearslong disinflation process. “On the other hand, the fact that it remained above our targets stands out as a partial failure.”

He added that policymakers have seen a slowdown in consumer demand from credit-card spending to retail sales — which could aid in jump-starting stalled disinflation. Baseline price increases have cooled modestly for two consecutive months to 31.8% in July.

“We have once again seen the importance of tight monetary policy in limiting the impact of recent shocks on inflation,” Karahan said.

Karahan said the monetary authority would for now continue funding from its more expensive, overnight rate of 40% “given the ongoing uncertainty.” The bank suspended lending from its main repo policy rate of 37% after the outbreak of the war in late February, resulting in a de facto rate hike.

“A return to one-week repo is on the agenda,” Karahan added, adding that timing for the return would be based on future market conditions.

The central bank kept unchanged its inflation target of 24%, a figure that’s distinct from the forecast and used as a gauge to determine the interest-rate path.

It also presented a 2027 year-end inflation forecast and target of 15%, which Karahan said policymakers would reassess later this year.