Turkish Central Bank raises inflation forecasts for 2014, 2015

Turkish Central Bank raises inflation forecasts for 2014, 2015

Turkish Central Bank raises inflation forecasts for 2014, 2015

Central Bank Governor Erdem Başçı. AA Photo

Turkey’s inflation will be higher than previously forecast this year and in 2015, although falling oil prices could temper its rise, the Central Bank said on Oct. 31, pledging to keep policy tight until the inflation outlook improves.

Presenting the bank’s quarterly inflation report, Governor Erdem Başçı said inflation was now expected to be around 8.9 percent at the end of 2014, an upwards revision from a mid-point forecast of 7.6 percent in its July report.

He cited higher food prices as a result of bad weather and lagged effects of currency depreciation as the main reasons for the change in this year’s forecast. The bank sees food prices rising 12.5 percent this year, more than the 9 percent it had previously expected.

The inflation forecast for 2015 was increased to 6.1 percent from 5 percent previously, while the bank’s medium-term inflation forecast remained at 5 percent, he said.

The new projections were lower than the inflation forecasts of 9.4 percent for 2014 and 6.3 percent for 2015 included in the medium-term program, unveiled by Deputy Prime Minister Ali Babacan on Oct. 8.
The bank revised downwards its oil price forecasts, to $102 per barrel for 2014 from $108 previously and to $92 per barrel for 2015 from $106, and said cheaper oil would limit upward pressure on inflation for this year and next.

Turkey imports almost all its energy.

Turkish inflation has remained stubbornly high even though interest rates are considerably above their levels of a year ago. The Central Bank left its key rates unchanged at its latest policy meeting last week.

“With the continued decline in cumulative exchange rate effects, the return of food inflation to the average level of previous years and the fall in commodity, especially oil, prices, inflation is forecasted to record a notable decrease in the upcoming year,” Başçı said.

A measured rate cut could be on the agenda in the coming period if global conditions allow a significant decline in long-term interest rates and in inflation, he added.

“Monetary policy stance should remain tight in order to bring inflation outlook in line with medium term target,” said Finansbank economist Gökçe Çelik in a note.

“Consequently, inflation outlook is still far from justifying an interest rate easing, in our view. Having said that, we cannot rule out an attempt by central bank to cut rates going forward, especially if global conditions ensure lower global interest rates.”

Governor Başçı also said that he does not believe the lira is over-valued at current levels, after the currency’s real effective exchange rate rose in September.