Turkish Central Bank raises inflation forecasts, but confident on months ahead

ISTANBUL

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Turkey’s Central Bank raised its inflation forecasts for this year and 2018 on April 28, saying it was ready to tighten policy further if needed, while adding that it was confident its recent steps would start to bear fruit in the months ahead, Reuters has reported. 

At a quarterly presentation, the Bank raised its mid-point forecast for inflation at the end of 2017 to 8.5 percent from a previous forecast three months ago of 8 percent. It lifted its forecast for the end of 2018 to 6.4 percent from 6 percent and predicted that the rate would stabilize around 5 percent in the medium-term. 

Governor Murat Çetinkaya said monetary policy would remain tight until there was a significant improvement in the inflation outlook. 

He said the Bank’s sharp monetary tightening since January would start to impact inflation over time.

Inflation surged to an 8.5 year high above 11 percent in March due to depreciation in the Turkish Lira and higher import prices as well as rising food prices. Core inflation increased in the first quarter of 2017, while non-core items such as unprocessed food, energy and alcohol-tobacco provided a significantly larger contribution to inflation.

“The CBRT [Central Bank] has implemented a strong monetary tightening since January to contain the deterioration in the inflation outlook,” the Bank said in written highlights of Çetinkaya’s comments.

“The first impacts of the monetary tightening appeared in financial indicators, whereas its lagged effects on inflation will be observed in time ... Inflation is expected to fall in the upcoming months,” he added.

Risks to food inflation – another major determinant of inflation forecasts – are, however, considered to be on the upside, according to the Bank’s report. 

“Due to the recovery in the exports of food products and the impact of the exchange rate developments, food inflation might exceed current projections, which are based on the assumption that measures taken by the Food Committee will considerably balance the upside risks to food prices,” it underlined. 

The Central Bank surprised investors by hiking the highest of its multiple interest rates on April 26, lifting its late liquidity window rate by 50 basis points to 12.25 percent.

But it again refrained from lifting its main repo rate, leaving it on hold at 8 percent. 

Çetinkaya said the recent rapid rise in inflation meant price behavior would need to be closely monitored and that the Bank would use all available instruments and tighten policy further if necessary. But he vowed there would be no knee-jerk moves.

“We’re taking the medium-term inflation outlook into consideration rather than focusing on temporary fluctuations. We won’t give premature responses to these fluctuations,” he said.

Economic activity was expected to gain pace in the second quarter, he said, and forecast that the contribution of exports to growth would increase thanks to stronger external demand.