Turkey Inflation

Turkey in huge trouble? Central bank raises inflation projections AGAIN

Central Bank of the Republic of Turkey on Thursday raised the inflation forecast for the current financial year from 60.4 percent to 65.2 percent. There have been rumors earlier that the Turkish central bank might raise inflation projections as repeated interest rate cuts in an unorthodox manner have skyrocketed prices of essential commodities in the economy.

Turkey which has been facing immense inflationary pressure for the past year is still in a huge economic crisis due to the unscientific economical decisions of the central bank of the country.

Governor of the central bank of Turkey, Sahap Kavcioglu said on Thursday that the central bank has so far not much successful in curbing high prices in the economy. According to the governor, inflation in the Turkish economy will come down rapidly as a continuous supply of goods will ease pressure on the economy. Maintaining exchange rates in a stabilized manner and normalization of pricing behavior will also assist in bringing down high inflation rates.

When asked about how he assesses the performance of the central bank during the economic crisis, Kavcioglu told reporters that they do not consider themselves very successful. He also added that the decisions taken by central bank authorities would make them successful soon in a short period.

The governor said the two prerequisites for price stability were achieving a lasting current account surplus and the dominance of the lira in households, firms, and banks’ balance sheets.

The supply chain crisis which was triggered by the COVID-19 pandemic and the US-China trade war has had a serious impact on the Turkish economy. Prices were going upward and actions taken by the central bank of Turkey were proving to be ineffective in controlling price instability in the economy. The special military operation of Russia in Ukraine created another crisis as Western Powers such as the USA, Europe, and Canada began imposing harsh sanctions on the Russian government and Russian business entities.

Sanctions and counter-sanctions by nation-states resulted in an energy crisis and a more severe global supply chain crisis. Energy prices soar all over the world along with prices of essential commodities. Various major economies witnessed high inflation rates which were sometimes historically highest.

To counter the high inflation in the economies, central banks across the globe decided to increase interest rates which will reduce cash flow in the economy which will in turn ease inflationary pressure. Even though the Turkish central bank also began following an aggressive interest rate hike policy, the government of Turkey took a turn on that and decided to cut interest rates.

President of Turkey, Recep Tayyip Erdoğan pledged that he will bring down interest rates to single digits. This move was seen as a political move by Erdoğan to reduce borrowing costs and receive public support.

The decision to cut interest rates backfired in several ways as inflation skyrocketed in the economy. In September 2022, the country witnessed annual inflation of 83.45% which was the highest in 24 years. Turkish Lira which is the official currency of the country tumbled against the dollar and other currencies.

While other central banks continue to follow the policy of aggressive interest rate hikes, Turkey stands as an outsider which is hurting the economy more than ever.

Erdoğan has prioritized exports, production, and investment as part of an economic program that aims to lower inflation by flipping Turkey’s chronic current account deficits to a surplus.

That target is all but unattainable this year due to the surge in energy prices and a global economic slowdown that is likely to hit Turkey’s exports. The government does not expect to see a surplus in the next three years.