Turkish Central Bank's new governor surprises with high inflation forecast

Turkey's central bank raised its end-2023 inflation forecast to 58.0% from 22.3% in its previous report, its new governor, Hafize Gaye Erkan, said on Thursday, vowing to continue the bank's gradual monetary tightening.

Erkan stepped into the spotlight for the first time on Thursday when she unveiled fresh inflation forecasts, a fraught moment for an institution still struggling to regain credibility under her stewardship.

She said the exchange rate of the lira, which has weakened sharply this year, was the main factor in the upward revision, with the end-2024 inflation prediction raised to 33% from 8.8%.

Experts anticipated that the policymakers would nearly double their projection but were surprised to see an even more substantial increase in the inflation forecast.

The appointment of Erkan and Finance Minister Mehmet Simsek, with years of experience at US investment banks between them, held out the promise of an aggressive pivot from unconventional policies under Erdogan that contributed to an exodus of foreign investors and an inflation crisis last year.

But Erkan’s two interest-rate hikes by a cumulative 9 percentage points confounded the market, which expected an even sharper liftoff for borrowing costs that remain deeply negative when adjusted for prices. As part of an approach the central bank describes as “gradual,” it’s also turned to alternative tightening measures to curb loan growth and mop up excess liquidity.

Annual inflation fell to 38.21% in June, having peaked at a 24-year high of 85.5% in October last year. But economists have revised their year-end forecasts to as high as 60% due to the lira's continued decline and various tax hikes in July.

The lira traded at 26.95 as Erkan spoke, unchanged from before the news conference.