Turkey: Tighter For (Even) Longer…

The Central Bank of Turkey kept its 2021 inflation forecast unchanged despite growing pricing pressures and signaled a commitment to reduce inflation with further tightening if needed. The bank also strengthened its forward guidance and suggested it would keep policy tighter for longer.

The Turkish Central Bank in Ankara

CBT Governor Naci Ağbal introduced the first inflation report of the year and provided detailed comments about the latest developments and their impact on the current monetary policy stance, with clear forward guidance.

The CBT kept its 2021 and 2022 inflation projections unchanged at 9.4% and 7.0%, respectively, with the Bank expecting a convergence to its 5% inflation target in 2023. The Bank cited the following variables as major determinants in its forecast trajectory for this year:

  • Food inflation (+0.2ppt), due to an upward revision in the annual figure to 11.5% from 10.5%, with ongoing pressure in global food prices and the impact from an expected improvement in the tourism sector. 
  • An increase in real unit labor costs (+1.0ppt).
  • TL-denominated import prices (-0.4ppt), likely due to a different exchange rate path projection despite a hike in oil price forecasts to US$54.4 per barrel from US$43.8 per barrel.
  • Falling inflation expectations in the CBT’s policy framework (-0.5ppt). For the next year, the bank sees support from a tight monetary stance and an improvement in expectations.

In December, annual inflation was again higher than expected, reaching 14.6%, due to food and transportation prices. This was a reflection of continuing cost-push factors, still strong domestic demand, and elevated services inflation being highly sticky at current levels.

The outlook has also deteriorated due to a recent significant hike in the minimum wage, by 21%, as well as a rise in oil and commodity prices and the continuing uptrend in food inflation. Given that the CBT’s forecasts in the inflation report are actually targets now, and the CBT has not made a change to the 2021 inflation forecast despite growing pricing pressures, it remains committed to its previous target/forecast for this year.

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