Turkey’s central bank raises inflation forecast, maintaining tight policy pledge

ISTANBUL – Hürriyet Daily News

The Turkish Central Bank Gov Başçı says the revision in iflation forecast is led by exchange rate developments. DAILY NEWS photo, Selahattin SÖNMEZ

The Turkish Central Bank has revised its inflation forecast for the year-end upwards in its quarterly inflation report, while vowing to keep its inflation-prioritized monetary policy tight and predictable.

The bank, as expected, forecasted the inflation to edge up to 6.8 percent at the end of 2013, and 5.3 percent at the end of 2014, at higher levels than its previous forecasts of 6.2 and 5 percent respectively.

During the news conference held to present its quarterly inflation report, Governor Erdem Başçı said, “Currently the course of core and headline inflation is much higher than the target of 5 percent. Therefore, don’t expect an easing of monetary policy until we approach the inflation target, and even achieve it.”

The Turkish inflation proceeds above expectations, particularly as of the second quarter, mainly due to the devaluation of Turkish Lira, which was hit harshly when the United States’ central bank Federal Reserve signaled it may taper off its monetary easing.

“0.4 percentage points of the revision in 2013 was led by exchange rate developments, while 0.1 percentage points stemmed from the rise in average oil price assumption,” the last inflation report of this year, read the report released yesterday.

The report also revealed the bank’s roadmap, which appears to be focusing on making the bank’s policies as gradually predictable possible, with the aim of reducing global incidents’ impact on inflation.
As the first step to predictability, the bank announced the stock balance of the 4.5 percent funding provided with a limited weekly amount of 10 billion liras until the year-end.

Repeating the bank has no plans of raising its interest rates, Başçı also said their policies are focused on fighting inflation and if it is needed they still have a number of alternative instruments such as foreign exchange reserves and foreign required reserve ratios. There is also margin for the bank to raise its interest rate, he added.

He said the bank sees the possibility of the lira gaining value is higher than it being lowered, which will also have a positive impact on inflation.

When he was asked about whether he insists on his prediction that the dollar to lira exchange rate will be 1.92 by the end of this year, Başçı said this was not a prediction, it was an assumption, avoiding pointing to a new rate.

Başçı pointed to 1.92 rates in an interview in August, triggering a still-lasting controversy among analysts, who seem to be split about the potential conclusions of his bold approach.

While some warn of the risks of setting a psychological threshold for investors, some say his confidence and determination will be beneficial for stability in the long-run.

Last week the bank kept all its key interest rates on hold, sticking to its pledge not to defend the lira with rises in interest rates.

The bank widened the interest rate corridor in August by raising the overnight lending rate to 7.75 percent from 7.25 percent.