The Turkish central bank on Tuesday sharply hiked its inflation forecast for 2018 to well over 13 percent, putting new pressure on the embattled lira and raising fears over the extent of price pressure in the economy. Turkey has been dogged in recent months by its highest inflation of recent years but the government of President Recep Tayyip Erdogan has indicated it does not want rate hikes to keep prices down.
The bank said in its latest report that inflation was "likely to be 13.4 percent" at the end of 2018, up from its 8.4 percent estimate in April this year. After the announcement, the lira hit 4.9 against the US dollar, a loss of 0.6 percent on the day. Since January the lira has lost over 23 percent of its value against the dollar.
The inflation forecast for 2019 also was increased substantially to 9.3 percent from 6.5 percent while the bank said it hopes inflation will reach 6.7 percent in 2020. The bank, which has a nominal inflation target of five percent, raised the food inflation estimate for 2018 from seven to 13 percent. Inflation in June had reached 15.39 percent in June from the same period the year earlier for the first time since 2003. July data will be released on Friday.
Economists say that the central bank has long proved to be over-optimistic in its inflation forecasts and QNB Finansbank said the latest projections "still stand below the market expectations and our forecasts". The bank defied calls by experts by not hiking interest rates at its latest meeting. Governor Murat Cetinkaya, presenting the inflation report, said the bank took its decisions taking inflation into "careful consideration".
Leaving the door open to future rates hikes, he said: "The central bank... in its objective to secure price stability will take and continue to take the necessary steps at the necessary moment." The bank struck a downbeat note on growth, saying data for the second quarter suggested that "economic activity has decelerated and started rebalancing".
The Turkish economy grew by 7.4 percent in the first quarter of 2018 but economists predict that activity will slow down in subsequent quarters. QNB Finansbank said the bank's failure to raise rates was "likely to render the lira exposed to further sell-off pressure" with an upsurge in tensions between Ankara and Washington not helping.
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