How do Monetary Policy and Inflation Announcements Affect Firm Expectations in High Inflation?

Abstract This paper examines how monetary policy committee announcements and inflation surprises affect Turkish firms’ inflation expectations and foreign exchange (FX) management decisions during the 2015–2024 period—a time characterized by both relatively stable and highly volatile inflation. Using survey data, we define monetary policy (inflation) surprises as the unexpected component of interest rate (inflation) forecasts measured within a narrow window around policy announcements. First, we show that firms’ aggregate inflation expectations change significantly in response to monetary policy shocks, but their response is highly state-dependent: In relatively stable inflation environments, firms react in line with standard theory, anticipating a decline in prices while becoming pessimistic about the economic outlook. In contrast, in volatile settings, firms adopt a supply-side interpretation, revising their expectations upward amid pessimism. Second, inflation surprises increase inflation expectations and heighten pessimism regardless of the state, providing additional evidence for the supply-side view. Third, a positive inflation surprise induces an increase in FX holdings—reflecting concerns about potential currency depreciation—whereas an unexpected policy rate hike prompts firms to reduce FX positions in anticipation of currency appreciation. Our findings demonstrate that in a high-inflation environment, firms are especially attentive to macroeconomic developments, revising their inflation expectations and adjusting their financial strategies accordingly. These results underscore the importance of monetary policy communication and inflation news in shaping firm-level decisions, particularly when inflation is elevated and volatile.