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Turkish Inflation Crisis Rages But Central Banker Isn’t Blinking

·3 min read

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Turkey’s central bank governor downplayed the inflation crisis plaguing his country, blaming external shocks and defending the ultra-loose policies he credits for forging the most recession-proof economy in Europe.

Governor Sahap Kavcioglu said Thursday that consumer inflation will end the year almost 18 percentage points higher than the central bank’s last projections showed in April. It’s now set to reach 60.4%, about 12 times the official target, before slowing to 19.2% by the end of next year and 8.8% in 2024.

Appearing alone at the podium in the central bank building in Ankara, Kavcioglu cited the rising cost of imports and food as well as the impact of a weak lira for the upward revisions. The governor unveiled his latest forecasts at the monetary authority’s quarterly inflation report, days after it left interest rates unchanged for a seventh month even as annual price growth hit 78.6% in June.

“We are taking serious measures on inflation and will continue to do so,” Kavcioglu said. “Our expectation is for inflation to quickly come down at the end of the year with the decisions we’ve taken and will take.”

In place of higher rates, authorities have instead relied on less direct measures, focusing on curbing commercial loan growth as well as policies aimed at widening the use of the local currency and channeling capital toward long-term investment.

The measures have done little to protect the lira, the worst performer in emerging markets so far this year after losing more than a quarter of its value against the dollar.

Different Tack

The lack of urgency by Kavcioglu stands in stark contrast to his counterparts around the world who are unleashing the most aggressive tightening of monetary policy in decades after taking the blame for responding too slowly to rising prices.

Asked about the policy divergence with the rest of the world during Thursday’s meeting, he said that only “time will tell” which central banks are right or wrong.

“Our mandate includes jobs, growth and generating policies in coordination with government policies,” Kavcioglu said. “We will continue to fulfill our responsibility to strengthen the economy in the best way we can.”

Inflation in Turkey is already at a 24-year high, with Goldman Sachs Group Inc. expecting it to peak at 90% in October-November and Bloomberg Economics seeing it at 69% at the end of the year. At almost 65% below zero, the country’s borrowing costs are the world’s most negative when adjusted for prices.

But Kavcioglu has the backing of President Recep Tayyip Erdogan, who believes -- contrary to mainstream economics -- that higher rates cause faster inflation.

Jobs, Exports

Erdogan has said that by reducing rates, Turkey was prioritizing investments, exports and job creation in the hope of creating an economy that thrives on local production. Another goal has been to reduce the deficit in the current account to make Turkey less susceptible to external shocks and rapid reversals in capital flows.

The scorecard presented by Kavcioglu on Thursday suggested Turkey is making some headway. Since the second quarter of 2020, the number of employed people has risen by 2.7 million as of the first three months of this year.

When adjusted for cyclical effects, he said the current-account balance was in balance for two consecutive quarters for the first time since 2004. The broadest measure of trade in goods and services was $6.47 billion in May.

But fulfilling its unofficial role of orchestrating Erdogan’s new policy mix, the central bank fell far behind its inflation goals. Erdogan sees a “marked” slowdown in prices from after February next year.

Kavcioglu said the bulk of inflation pressures came from external shocks that included the cost of food, energy and basic goods. Factors related to demand had only a limited impact on inflation, he said.

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