Turkey Central Bank raises inflation forecasts

ISTANBUL

REUTERS photo

Turkey’s Central Bank raised its inflation forecasts for this year and signaled it could hike rates once the U.S. Federal Reserve begins to tighten, in what could be a boost for the long-suffering Turkish currency.

In its quarterly report on inflation, the bank forecasted an inflation mid-point of 7.9 percent at the end of 2015, up from 6.9 percent in its previous report.

For the end of 2016, it forecasted the mid-point at 6.5 percent, up from 5.5 percent in its previous report.

In a news conference following the release of the report, Governor Erdem Başçı said would not be “totally incorrect” to say Turkey may raise interest rates if the U.S. Federal Reserve does, adding that Turkey could move in that direction depending on the inflation outlook, as quoted by Reuters. 

“In the third quarter of 2015, annual consumer inflation posted a quarterly increase of around 0.75 points compared with the previous quarter and rose to 7.95 percent, remaining above projections of the July Inflation report. Food prices and exchange rate developments are the main drivers of this rise in annual inflation,” said Başçı.  

Saying that the Central Bank’s upward revision in inflation forecasts is of great importance, Capital Economics analyst William Jackson told Reuters: “When we consider how heavy a pressure the Central Bank faced in any rate hike move in the past, it will be very convenient for the bank to mention the triggering effect of the Fed’s moves for a possible rate hike of its own.”

Başçı said the inflation rates will maintain its current levels for a while and then start to decline.           

Foreign exchange movements and food prices have influenced Turkey’s annual inflation, although the foreign exchange impact on prices is more limited than in previous years, he said, as quoted by Reuters. 

“Annual core goods inflation posted an upsurge owing to the cumulative depreciation in the Turkish Lira,” the report said. This “pass-through” from the devalued currency helped push up inflation, according to the report. 

The lira has lost around 25 percent in value against the dollar this year.

“Medium-term inflation expectations and repercussions of wage developments on inflation will be critical for the inflation outlook over the upcoming period. The establishment of the Committee on Monitoring and Evaluating Food and Agricultural Product Markets has been an important structural reform regarding inflation.

Against this background, inflation is expected to hover around current levels for some time due to exchange rate effects and start slowing down afterwards,” noted the report.

 The report also cited volatile global financial conditions as a factor in determining monetary policy.  Volatility in global markets had repercussions also in the Turkish economy and financial indicators went through fluctuations amid domestic uncertainties. 

“In the third quarter, similar to other emerging economies, risk premium indicators and long-term rates in Turkey also increased,” the report said.