Expectations for Turkey's end-2018 inflation rate rose from 10.07% in April to 11.07% in May, the central bank’s regular survey of businesses and analysts showed on May 18.

“The Turkish lira’s decline in recent weeks will keep headline inflation elevated, prompting the central bank to shrug off political pressure and hike interest rates in the coming months,” Jason Tuvey of Capital Economics said on May 15 in an emailed note. “The big risk is that the lira’s decline sets off a vicious cycle of rising inflation and inflation expectations.”

The central bank’s official inflation target for 2018 is 5%. The Turkish central bank has lifted its CPI inflation forecast for 2018 to 8.4% in its latest inflation report from its previous estimate of 7.9% given in the January inflation report, central bank governor Murat Cetinkaya said on April 30.

Turkey’s annual consumer price inflation rose to 10.85% in April, the highest level recorded this year, from 10.23% in March. 

Turkey’s inflation jumped into the double digits in February 2017. Since then the rate has only once moved back into the single digits, with that occurrence recorded in July last year due to the base effect of the failed coup attempt in July 2016. The peak point was November’s 12.98%.

Survey respondents also said that they expected the USD-TRY rate to be 4.4350 at the end of this year, a significant rise from the 4.2220 anticipated in the April survey.

Meanwhile, the Turkish lira tested a fresh record low of 4.5050 after the local markets were closed on May 18. It was trading at 4.4962 as of 21:50 local time on May 20.

Respondents in the central bank survey forecast that GDP growth will be 4.6% this year, slightly lower than 4.7% in April.

On April 17, the International Monetary Fund (IMF) announced in its latest edition of the World Economic Outlook that it had revised its 2018 GDP growth forecast for Turkey upwards by 0.9pp to 4.4%.

A tight monetary stance would be required to keep inflation expectations anchored, the IMF said, projecting inflation in Turkey would come in at 11.4% in 2018.

Looking at expectations for Turkey’s current account balance as a percentage of GDP, the IMF assessed that it was -5.5% last year and would be -5.4% in 2018.

According to the central bank survey, Turkey’s end-2018 current account deficit expectations increased from $50.8bn in April to $53.5bn in May.

Turkey’s 12-month cumulative deficit reached $55.4bn in March, up from $53.7bn in February and $33.5bn in March 2017.