2018 inflation predictions wildly optimistic

The Central Bank of Turkey announced in January in its first report that it had raised the inflation target to 8% up from 6.50%, which was the initial target in its first report. But it didn’t seem to be able to remain at 8% either. Therefore, the bank revised its inflation prediction in its second report released in April and foresaw inflation of 8.50%. The third report, released in August, carried a new prediction of 8.70%. The prediction was 8.70% but even this was not an achievable target. The government announced in its medium-term plan (MTP) for 2018-20 that CPI is predicted to be realized as 9.50% this year. In addition, last Wednesday, the central bank revised its inflation prediction once more, up to 9.80%.

Murat Cetinkaya, governor of the bank, stated that they increased year-end CPI prediction upwards by 0.6% up to 7% as he was announcing the final inflation report of the year. It was normal to predict such a level for 2018 as the MTP had a rate of 7%. The MTP for 2018-20 foresees CPI as 6% for 2019 and as 5% for 2020.

Despite the prediction of 7% for 2018, it is understood that it will be difficult to maintain such a low level. Together with the trend in recent years, and the base effect, we may see a realization of 8% to 9%. Actually, inflation between 8-9% is the most optimistic prediction.

Foreign exchange entering a trend of rise recently will create a cost pressure. The fact is there is a possibility of a presidential election in 2018. It may not be an early election, but as the economy will focus on presidential elections in 2019, there has to be some revisions regarding inflation predictions.

And that won’t be a downwards revision then. The prediction will be revised upwards. And that means a significant change in the 2018 prediction which is currently between 8% and 9%.