Turkey’s central bank signals more rigorous policy

ANKARA

Governor of the Central Bank of the Republic of Turkey, Erdem Başçı speaks at a conference June 12. DHA photo

Turkey’s Central Bank raised yesterday its inflation forecasts to 6.2 percent for this year from a previous 5.3 percent, saying lira volatility posed a threat to prices, and signaled further interest rate rises.

At a news conference announcing its quarterly inflation report, Governor Erdem Başçı said core inflation was expected to rise due to exchange rate volatility. But while maintaining a stable lira was a priority, he said there was no set limit at which it would defend the local currency. “The central bank will not defend a specific lira level,” he noted.

The bank hiked its mid-point inflation forecast for the end of 2013 to 6.2 percent from a previous 5.3 percent, and for the end of 2014 to 5 percent from 4.9 percent. It also said growth may undershoot an official forecast of 4 percent for this year.

Turkey’s inflation rate reached 8.3 percent in the second quarter, above the forecasts, due to crude food and services inflation, Başçı said. The bank expected that the inflation rate would rise to a peak point of 9 percent, in July, and would then follow a downward trend from August.

The governor said that after the U.S. Central Bank (Fed) decision that signaled the tapering of the high liquidity in the global markets by 2014, the global financial markets began to fluctuate. The currency was devaluated and capital flow slowed down in Turkey as in other developing countries. The Central Bank implemented tight fiscal policy by raising the upper boundary of the interest rate corridor in order to reduce the volatility of the lira and assure the financial stability.

The bank raised its overnight lending rate by 75 basis points to 7.25 percent a week ago in response to capital outflows that have knocked the lira down as much as 9 percent against the dollar over the past few months.

However, the Central Bank could implement additional tight fiscal policy to meet the inflation rate with the medium term program targets, he said. He said the bank was not currently planning to make adjustments to the reserve requirements or reserve option coefficients it uses to fine tune liquidity conditions.

The central bank has already burned through more than $6.8 billion, or about 15 percent of estimated disposable reserves, this year to try to defend the lira without raising rates, a policy which has had limited success.

Last week’s rate hike came days after Prime Minister Recep Tayyip Erdoğan met with senior members of his economic team, prompting suggestions that Başçı had only acted after a government nod. But Başçı asserted the bank’s independence, saying it received approval only from monetary policy committee members before acting.

The government is targeting growth of 4 percent this year, a significant acceleration from last year’s 2.2 percent gain but well below the 8.8 percent expansion of 2011, which was Europe’s best. In the first quarter the economy grew 3 percent.

Başçı said he expected loan growth still to be running at significantly above the bank’s 15 percent reference level at the end of the year, but forecast it would fall to around target in the middle of 2014.