The central bank of Turkey increased its end-2015 inflation forecast to 7.9% from a previous 6.9%, citing exchange rate movements.

The inflation is expected to be, with 70% probability, between 7.4% and 8.4% (with a mid-point of 7.9%) at end-2015, said the bank in the latest edition of its inflation report published on October 28.

The bank also revised its end-2016 inflation forecast upward to 6.5% from a previous 5.5%.

But, a survey by the central bank showed in October that the markets’ inflation expectations deteriorated, rising to 8.25%.

It would not be totally incorrect to say the central bank may raise interest rates if the FED hikes its own rates, the bank’s governor Erdem Basci said, speaking at the release of the inflation report. But, he added that the bank’s rate decision would depend on the inflation outlook.

This month, in a widely expected move, the central bank kept its benchmark rates on hold.

Basci believes the US Federal Reserve will start normalising policy in coming months.

Moody’s warned in a report published on October 22 that Turkey is the most vulnerable to external risks because of its high reliance on external capital. A FED hike may trigger a capital exodus from emerging markets, including Turkey which is marred by political uncertainness and social polarisation. 

The central bank reaffirmed in the inflation report that it will maintain the tight policy as along as needed. “Future monetary policy decisions will be conditional on the inflation outlook.”

The bank pointed to the food prices and exchange rate developments as the main drivers of the rise in annual inflation, but it said that the tight monetary policy stance and the mild course of domestic demand limit the exchange rate pass-through to prices compared to similar episodes in the past.

The bank sees the food inflation at 8% at the end of this year and at end-2016, unchanged from its previous forecasts.

“Considering the likely slowdown in import demand based on domestic demand developments, the contribution of external demand to growth is expected to increase in the second half,” the bank also said in the report.

Turkey’s GDP growth picked up to 3.8% y/y in the second quarter, from 2.5% in Q2. Households’ final consumption that account for more than 65% of the country’s GDP, increased by 5.6% y/y in Q2, after rising 4.6% y/y in the previous quarter, while export performance has been weak.

Consumer sentiment surprisingly recovered from a six-year low in October, but the course of the political developments after the November elections will determine whether consumer confidence remains strong enough to support the economic growth.

The government forecasts a GDP growth of 3% for 2015, and a 4% expansion for 2016.

Turkey needs to overcome its political problems that intensified after the June’s inconclusive elections to refocus on the economic reforms and to re-ignite the engine of economic growth.

Business circles in Turkey hope for a coalition government of the Justice and Development Party (AKP) and the centre-left People’s Republican Party (CHP), because only a consensus between the country’s two major parties could ease the social tension and dangerous polarisation. Most opinion surveys, however, indicate that the November elections will produce yet another hung parliament.

Turkey's CPI Inflation
	Weights	Aug, y/y	Sep, y/y	Sep, m/m
Headline	100	7.14	7.95	0.89
Food and non-alcoholic beverages	24.25	9.71	10.73	1.24
Alcoholic beverages and tobacco	4.82	4.13	5.67	0.35
Clothing and footwear	7.38	4.72	4.38	-2.76
Housing, utilities	15.79	8.19	8.28	0.58
Furnishings, household equipment	7.78	8.60	9.42	1.16
Health	2.57	6.72	7.42	1.08
Transportation	15.38	0.60	2.42	1.93
Communications	4.38	2.03	2.82	0.72
Recreation and culture	3.54	9.19	10.38	1.16
Education	2.53	6.84	5.9	0.88
Hotels, cafes and restaurants	6.98	14.26	13.99	0.97
Miscellaneous goods and services	4.60	9.91	11.23	1.93
Source: tuik