Turkey Inflation to Ease Only Slightly to 55.5% by End-2022

A man looks at a butcher shop window in Ankara, Turkey February 16, 2022. (Reuters)
A man looks at a butcher shop window in Ankara, Turkey February 16, 2022. (Reuters)
TT

Turkey Inflation to Ease Only Slightly to 55.5% by End-2022

A man looks at a butcher shop window in Ankara, Turkey February 16, 2022. (Reuters)
A man looks at a butcher shop window in Ankara, Turkey February 16, 2022. (Reuters)

Turkish inflation is seen slipping only to 55.5% by year-end, a Reuters poll showed on Friday, remaining elevated for longer than Ankara expects thanks to unconventional monetary policy and a persistently weak currency.

Inflation in Turkey has soared since December in the wake of a currency crisis that tore 44% off the lira's value against the dollar last year.

Prices rose 61% in March from a year earlier, lifted further by higher global commodity prices following Russia's invasion of Ukraine in late February.

While the government expects a sharp drop in inflation at the end of 2022 due in part to favorable base effects, the median estimate in the Reuters poll of 31 economists showed it slipping only a few percentage points to 55.5%.

That forecast is more than double the median estimate of 26.8% by year-end in a poll conducted in January.

Inflation is now forecast to drop to around that level, 25%, a year later, in stark contrast to Ankara's view it would be in single digits by the middle of next year.

It was seen falling to 17.8% by the end of 2024, based on a lower sample of poll contributors.

A currency crisis last year was prompted by a series of central bank interest rate cuts long sought by President Recep Tayyip Erdogan, who holds the unorthodox view that higher interest rates cause inflation rather than restrain it.

"Even before the onset of the geopolitical crisis in late February, Turkey's macro outlook was subject to considerable uncertainty due to the implementation of unconventional policies shaped by President Erdogan's views," noted Berna Bayazitoglu, analyst at Credit Suisse.

"In the absence of credible policies, Turkey's macro visibility and predictability remain low, keeping the margin of error around our base-case forecasts unusually large."

The central bank was forecast to hold its policy rate at 14.0% through to the end of 2023, although some economists predicted rate hikes up to 27.0% and others saw it 50 basis points lower at 13.5% by then.

Erdogan's new economic program stresses exports and credit to fuel growth, despite soaring inflation and widespread criticism of the policy from economists and opposition lawmakers.

Turkey's economy bounced back from the COVID-19 pandemic to grow 11% last year, its highest rate in a decade. But it has already slowed substantially and will continue to do so.

The median estimate of 37 economists for gross domestic product (GDP) growth in 2022 was 3.0%, compared to 3.5% in the previous poll. The median for 2023 was revised down to 3.3% from 4.0% previously.

Both the government and central bank have recently said Turkey's biggest economic problem is the chronic current account deficit, largely due to Turkey's heavy import bill.

However, surging energy prices have led to a widening in the current account deficit, which may also be made worse by a likely drop in tourism from Russia and Ukraine this summer.

Economists have sharply revised up their estimate for the current account deficit this year to a median 4.4% of GDP in this month's poll compared with 2.1% in January. They see it at 2.8% in 2023, from 2.3% previously.



Trump Goes to War with the Fed

US Federal Reserve Chair Jerome Powell, seen in April 2025, said he considered Fed independence to be a matter of law. Brendan SMIALOWSKI / AFP
US Federal Reserve Chair Jerome Powell, seen in April 2025, said he considered Fed independence to be a matter of law. Brendan SMIALOWSKI / AFP
TT

Trump Goes to War with the Fed

US Federal Reserve Chair Jerome Powell, seen in April 2025, said he considered Fed independence to be a matter of law. Brendan SMIALOWSKI / AFP
US Federal Reserve Chair Jerome Powell, seen in April 2025, said he considered Fed independence to be a matter of law. Brendan SMIALOWSKI / AFP

Donald Trump's simmering discontent with the US Federal Reserve boiled over this week, with the president threatening to take the unprecedented step of ousting the head of the fiercely independent central bank.

Trump has repeatedly said he wants rate cuts now to help stimulate economic growth as he rolls out his tariff plans, and has threatened to fire Fed Chair Jerome Powell if he does not comply, putting the bank and the White House on a collision course that analysts warn could destabilize US financial markets.

"If I want him out, he'll be out of there real fast, believe me," Trump said Thursday, referring to Powell, whose second four-year stint as Fed chair ends in May 2026.
Powell has said he has no plans to step down early, adding this week that he considers the bank's independence over monetary policy to be a "matter of law."

"Clearly, the fact that the Fed chairman feels that he has to address it means that they are serious," KPMG chief economist Diane Swonk told AFP, referring to the White House.

Stephanie Roth, chief economist at Wolfe Research, said she thinks "they will come into conflict," but does not think "that the Fed is going to succumb to the political pressure."

Most economists agree that the administration's tariff plans -- which include a 10 percent "baseline" rate on imports from most countries -- will put upward pressure on prices and cool economic growth, at least in the short term.

That would keep inflation well away from the Fed's long-term target of two percent, and likely prevent policymakers from cutting rates in the next few months.

"They're not going to react because Trump posted that they should be cutting," Roth said in an interview, adding that doing so would be "a recipe for a disaster" for the US economy.

- Fed independence 'absolutely critical' -
Many legal scholars say the US president does not have the power to fire the Fed chair or any of his colleagues on the bank's 19-person rate-setting committee for any reason but cause.

The Fed system, created more than a century ago, is also designed to insulate the US central bank from political interference.

"Independence is absolutely critical for the Fed," said Roth. "Countries that do not have independent central banks have currencies that are notably weaker and interest rates that are notably higher."

Moody's Analytics chief economist Mark Zandi told AFP that "we've had strong evidence that impairing central bank independence is a really bad idea."

- 'Can't control the bond market' -
One serious threat to the Fed's independence comes from an ongoing case in which the Trump administration has indicated it will seek to challenge a 1935 Supreme Court decision denying the US president the right to fire the heads of independent government agencies.

The case could have serious ramifications for the Fed, given its status as an independent agency whose leadership believes they cannot currently be fired by the president for any reason but cause.

But even if the Trump administration succeeds in court, it may soon run into the ultimate guardrail of Fed independence: The bond markets.

During the recent market turbulence unleashed by Trump's tariff plans, US government bond yields surged and the dollar fell, signaling that investors may not see the United States as the safe haven investment it once was.

Faced with the sharp rise in US Treasury yields, the Trump administration paused its plans for higher tariffs against dozens of countries, a move that helped calm the financial markets.

If investors believed the Fed's independence to tackle inflation was compromised, that would likely push up the yields on long-dated government bonds on the assumption that long-term inflation would be higher, and put pressure on the administration.

"You can't control the bond market. And that's the moral of the story," said Swonk.

"And that's why you want an independent Fed."