Turkey’s central bank has significantly raised its inflation forecast due to the higher cost of energy and other products that Turkey has to import. Central Bank Governor Sahap Kavcioglu now thinks inflation will be around 65.2 percent by the end of this year.
In July, consumer prices were expected to rise by more than 60 percent by 2022.
In 2023, according to Kavcioglu, inflation will decrease to more than 22 percent, partly thanks to the normalization of global energy prices. However, the cost of living in Turkey rose sharply last month and is now 83.5 percent higher than a year ago. That’s the highest level over two decades and more than sixteen times the central bank’s official inflation target of 5 percent.
Despite high inflation, under pressure from Turkish President Recep Tayyip Erdogan, the central bank has already cut interest rates several times this year. In addition, central banks are raising interest rates in other countries to curb inflation. Contrary to the prevailing theory among economists, Erdogan believes that higher interest rates lead to higher prices.
By lowering interest rates, Erdogan wants to depress the Turkish lira and stimulate the economy. As a result, the lira has fallen in value this year, making it cheaper for other countries to buy Turkish products. However, the low rate of the Turkish currency is also unfavourable because the country itself has to import many goods from abroad. In addition, the Turkish government has taken out many dollar-denominated loans, which are now becoming more expensive to repay.