Turkish policymakers have argued that the recent rise in inflation is a temporary phenomenon and this, in turn, has fuelled speculation in the markets that interest rates will be cut further. However, while we expect inflation to drop back a little over the next year, we think it will remain much higher than the central bank forecasts. This stems from our view that there is less slack in the economy than policymakers seem to think. If we’re right on this, any attempt to loosen policy will result in even higher inflation and a wider current account deficit.
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