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)

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.