Başçı sticks with inflation target, signals tightening

ISTANBUL - Hürriyet Daily News

Turkish Central Bank Governor Erdem Başçı stands in front of a backdrop of the Turkish Central Bank. Başçı is expecting inflation to begin to fall in the third quarter. AA photo

The Turkish Central Bank announced yesterday that its year-end inflation target would remain unchanged at 6.5 percent, but also signaled that it would resort to additional tightening in the interim to maintain its targets.

 “The Central Bank kept its end-2012 inflation forecast unchanged at 6.5 percent, despite the recent utility price hikes and upward revision to its oil price forecast,” said a TEB note to investors.

The 2013 inflation forecast was also kept broadly constant at 5.2 percent. The bank has not signaled any changes to the reserve rate, Central Bank Gov. Erdem Başçı said at a press conference after the inflation expectations were announced yesterday. The national lender will maintain its interest rate corridor, he said.

‘Single digit inflation likely’

While he did not hint at any changes to the current policy framework, Başçı did stress that inflation would begin to drop as of the third quarter of 2012, becoming especially apparent in the fourth quarter.

“There is a strong likelihood that inflation will drop to single digits. There will be a slight increase in June, but then toward the end of the year, there will be a sharp fall,” said Başçı.

The sharp price increases in the last three months of 2011 fueled the Central Bank’s expectation that inflation would exceed targets until the last quarter of this year, he said, adding that the bank would keep a sharp eye on price movements.

Başçı also said food prices would increase by roughly 7.5 percent by the end of the year, adding that oil prices would exceed Central Bank forecasts due to the high level of demand that has emerged since they published their January inflation report.

“The governor noted again that the direct impact of the utility price hikes in April would be 0.5 percent on inflation. In addition, the Central Bank raised its 2012 average oil price forecast to $120/bbl from $110/bbl, while keeping its food inflation expectation unchanged at 7.5 percent for the year-end,” said TEB.