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Turkey’s central bank hikes inflation forecast to 12.2%

ANKARA, Turkey: Turkey’s central bank responded to a lira slide by raising its year-end inflation forecast on Thursday to 12.2% from 9.4%, and its new governor said the tight policy would be maintained until price pressures decline.

Presenting a quarterly inflation report for the first time since he was appointed last month, Governor Sahap Kavcioglu said the policy rate, now at 19%, would be set above inflation, which topped 16% last month and is expected to rise more.

Kavcioglu sought in the presentation to convince economists that he would be as decisive as his predecessor, Naci Agbal, a respected policy hawk, in bringing down inflation to a 5% target over the next three years.

Yet Kavcioglu’s shock appointment as bank chief last month, which initially sent the lira down as much as 15%, has raised inflation via imports and piled pressure on the bank to keep rates high even though Kavcioglu has in the past urged cuts.

“We have given clear guidance … saying that the policy rate will be above inflation and we will continue that,” the governor said in a mostly prepared presentation. “We will continue the tight policy stance.”

Kavcioglu, a former banker and professor, predicted that inflation will peak in April before easing.

“The policy rate will remain above realised and expected inflation until inflation converges to the target,” he said.

After firming slightly, Turkey’s currency weakened nearly 1% to 8.25% against the United States dollar by 13:15 GMT. It is one of the worst performers in emerging markets this year, down 10%.

Serkan Gonencler, an economist at Gedik Yatirim, called the central bank’s year-end forecast “optimistic” and below market forecasts, adding it did not fully acknowledge how much the lira depreciation has raised import prices.

Inflation is expected to top 17% this month and drop to only 14% by the year’s end, according to a Reuters news poll this week. Some analysts, including at Goldman Sachs, expect it to reach as high as 18%.

Turkey has had double-digit consumer price inflation for most of the last four years.

The currency depreciation, as well as high energy and other commodity prices, pushed producer price inflation above 31% in March.

Economists raised inflation expectations and foreign investors fled Turkish assets last month after President Recep Tayyip Erdogan sacked Agbal and named Kavcioglu as Turkey’s fourth bank governor in less than two years.

The bank held rates steady at 19% this month, though it also removed an earlier pledge to tighten further if needed.

Analysts expect rate cuts just after midyear and say that premature easing could further compress real yields.

“The central bank looks more keen on cutting rates compared to the Naci Agbal term, but I don’t think they will cut rates while the inflation outlook doesn’t allow it,” Gonencler said.

“The central bank is aware of the impact an early cut would have, especially on the exchange rate,” he added.

The bank also raised its 2022 inflation forecast more modestly to 7.5%, and said 2022 food price inflation was forecast at 9.8%, compared to 9.4% in the previous report presented three months ago.

Kavcioglu said high inflation expectations continue to hurt price trends, adding that economic activity should slow in the second quarter and that employment was lagging behind growth.