Central Bank cuts inflation forecast in Turkey

Hurriyet Daily News with wires

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Turkey’s Central Bank foresees a deeper economic contraction and slower recovery than it previously estimated, Governor Durmuş Yılmaz said in a news conference in Ankara yesterday.

The Central Bank targets 7.5 percent inflation in 2009. "In 2009, with 70 percent probability, we predict the inflation on a range of 4.8 and 7.2 percent with 6 percent as the mid-point," Reuters cited Yılmaz as saying. The previous forecast for year-end inflation was 6.8 percent.

Inflation stood at 7.9 percent in March. The forecast is based on an average oil price of $55 a barrel in 2009, unchanged from three months earlier, Bloomberg quoted Yılmaz as saying. Oil traded at $51.51 a barrel yesterday. Yılmaz told a news conference he expected inflation to range between 3.5 percent and 7.1 percent in 2010. Consumer-price growth will slow to 4.9 percent in 2011 when the goal is 5.5 percent, he added.

The Central Bank has shaved 7 percentage points from the benchmark interest rate in six months as it tries to minimize an economic contraction the government forecasts at 3.6 percent this year. The benchmark rate is 9.75 percent, a record low, and Yılmaz said the Bank doesn’t expect an economic recovery until the middle of 2010.

The Central Bank will continue to cut interest rates so long as inflation slows, Yılmaz said. Its main reference for lowering benchmark rates is inflation, he said in response to whether delays to an International Monetary Fund, or IMF, loan accord might affect the Bank’s rates policy.

"The Bank may cut rates by another half or three-quarters of a point at the next meeting and then stop," said Erkin Işık, economist for Fortis Bank in Istanbul. "The Bank also appears to be concerned that the government announces steps to compensate for the worsening budget this year." The Bank next meets to set the benchmark rate on April 14.

Expecting the worst

The economy contracted 6.2 percent in the last quarter of 2008, the first shrinkage in seven years. Gross domestic product may post a "double-digit" decline in the first quarter and recent data indicate "a deeper contraction in 2009 than assumed in the January report, and a slower and more gradual recovery in 2010," Yılmaz said.

The government is seeking IMF lending to help support the Turkish Lira and bolster the budget as the slowdown eats into tax revenues. Yılmaz said delays to any deal "have a cost" and urged an end to the uncertainty over IMFas soon as possible. The government should also provide a clear plan of how it plans to reduce its borrowing requirement over the medium term, Yılmaz said.

The budget has "deteriorated a lot" this year, Yılmaz said, and steps to restore the balance would assist the Bank in slowing inflation. Heavy government borrowing threatens to limit financing available for companies, potentially slowing economic recovery, he said.

The country’s short-term external financing needs had fallen below $30 billion, according to Yılmaz, who said he did not see any obstacles to reaching a loan agreement with the IMF. He said differences over some issues, such as tax administration, had been overcome.

Turkey and the IMF are still talking on a three-year stand-by accord after the country's previous $10 billion deal expired a year ago. Markets have been clamouring for a deal to help Turkey weather the global financial crisis.

The IMF expects Turkey's economy to shrink 5.1 percent this year, after growing nearly 7 percent between 2002 and 2007. Possible IMF loans to Turkey should be directed to the Treasury to help it reduce its debt repayment load and leave more funds for the privaye sector to borrow, Yılmaz said.