Turkey’s Central Bank Lifts Inflation Outlook Amid Lira Rout


Turkey’s central bank raised its inflation projections for the end of this year by more than three percentage points, after a series of surprise interest-rate decisions failed to bolster a lira weakened by policy steps and international spats.

Consumer-price growth will finish the year at 12.1%, compared with a previous forecast of 8.9%, Governor Murat Uysal said Wednesday in Istanbul as he unveiled the final inflation report of 2020.

The central bank will maintain its tight monetary policy until inflation improves, Uysal said, warning that a weak lira poses risks to price stability. The currency extended its drop as the governor spoke.

Turkey’s Central Bank Lifts Inflation Outlook Amid Lira Rout

“In the period ahead, we can take all the necessary steps, including on policy interest rates, to control inflation by monitoring price developments,” Uysal said. The lira is “extremely undervalued,” he said.

Below are some of the highlights of his speech

  • Inflation to decline to 9.4% by the end of 2021, also an upward revision from 6.2%
  • End-2020 food inflation estimated at 13.5%, compared with 10.5% previously
  • The central bank’s 2020 average oil price forecast remains unchanged at $41.6 per barrel
  • Inflation to slow following the first quarter next year
  • The central bank has no target for the the nominal or real exchange rate but is sensitive to volatility that could jeopardize stability

Inflation Path

The central bank’s latest projections suggest an even bleaker outlook for inflation this year than forecast by the government. Treasury and Finance Minister Berat Albayrak raised government forecasts in September to 10.5% at the end of 2020 and 8% the following year.

His projections came a week after the central bank delivered a surprise 200-basis-point rate hike that was intended to stem the slide in the currency.

Investors considered it insufficient, however, and the lira continued to fall, buffeted by geopolitical risk as Turkey intervened in conflicts and renewed diplomatic tussles over energy finds in the Mediterranean.

Another unexpected decision followed on Oct. 22, when the central bank held the benchmark while raising the upper bound of its interest-rate corridor. That rattled markets as it signaled the central bank’s once more focused on stealth tightening to support the currency.

Survey of




Central Bank




Year-end 202011.8%10.5%12.1%5%
Year-end 20218%9.4%5%

“Pressures on inflation and the lira are likely to push the Turkish central bank to being more conventional,” according to VTB Capital analyst Akin Tuzun, who expects an outright rate hike in November.

In devising policy, the governor must weigh market reaction with the demands of President Recep Tayyip Erdogan, who continues to cast a long shadow over monetary policy. Erdogan handpicked Uysal to replace a governor who had failed to comply with his wishes to cut interest rates.

The Turkish leader is a firm believer that high borrowing costs fuel inflation. Most economists and central banks around the world believe the opposite.

The lira was down 0.8% against the dollar on Wednesday after sliding through the psychologically important 8 per dollar this week amid a flurry of negatives for risk assets. It’s now been depreciating for nine weeks, the longest rout since 1999.

Turkey’s Central Bank Lifts Inflation Outlook Amid Lira Rout

The currency’s slide of over 27% this year has distorted previous central bank inflation projections. Uysal predicted earlier this year that annual price growth would drop to single digits from the second half, only for it to end the third quarter at 11.8%.

The governor said on Wednesday he expects the exchange rate to normalize in the medium term. State banks are active in the currency market from time to time, he said.

The central bank’s reserves are sufficient to meet short-term needs, with Turkey in the final stage of securing new currency swap deals, according to Uysal.

©2020 Bloomberg L.P.

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