Central Bank cuts its inflation forecast

Bloomberg

Governor Durmus Yılmaz lowered the forecast for year-end inflation to 6.8 percent from 7.6 percent at a news conference in Ankara today to announce the bank’s quarterly inflation report. Inflation eased to 10.1 percent in December and the Bank is aiming for 7.5 percent this year.

The Bank’s forecast is based on an average oil price of $55 a barrel in 2009. "In this situation, measured rate cuts will continue at a slower pace," Yılmaz told a press conference Sunday in comments embargoed until yesterday.

Interest rate cut
The Bank has cut the benchmark interest rate by 3.75 percentage points in three months, taking it to a record low of 13 percent Jan. 15. Yılmaz has joined other policy makers globally in slashing the cost of borrowing as the global credit crunch pushes the Turkish economy toward recession. The Bank’s two-percentage-point rate cut Jan. 15 was "a major part of the rate reductions foreseen for the coming months," Yılmaz said yesterday.

The cuts have only "partially compensated for the pressure on our credit markets" from the global crisis, he said. Inflation is likely to slow to 5.8 percent in 2010, compared with a target of 6.5 percent, and to 5.2 percent in 2011 when the goal is 5.5 percent, Yılmaz said. After three consecutive years in which inflation has exceeded the Bank’s declared targets "this time there’s a chance that we’ll have to write a letter explaining a miss on the low side to the government and the IMF," Yılmaz said. "That’s not something we want."

Meanwhile, a survey predicted that Turkey’s trade deficit probably narrowed in December as weaker demand at home and cheaper oil and gas reduced the import bill.

The shortfall shrank to $3.9 billion from $6.4 billion in December 2007, the fourth consecutive contraction, according to the median estimate of 12 economists surveyed by Bloomberg. The statistics office in Ankara is due to report the data at 5 p.m. Friday.

Turkish consumer confidence hit a record low in November as economic growth slowed and the global credit crunch forced the government to look to the International Monetary Fund, or IMF, for a loan. A slump in energy prices is also helping to reduce the cost of imports.

"Exports fell seriously and imports probably declined even faster," said Şengül Dağdeviren, chief economist at ING Bank in Istanbul. "It’s just the latest proof of the halt in economic activity."

Growth slowed to 0.5 percent in the third quarter of 2008, the slowest pace since 2002.