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Turkish Central Bank Cuts Inflation Forecast, Delays Increase in Key Rate
Turkey’s central bank lowered its forecast for year-end inflation to 7.5 percent and said it will delay increases to the benchmark interest rate until next year.
Falling food and services prices, combined with decreasing demand for Turkish exports in Europe, persuaded the bank to revise its forecast from the 8.4 percent predicted in April, Central Bank Governor Durmus Yilmaz said at a news conference in Ankara today to release the bank’s quarterly inflation report.
The bank’s forecasts are based on the assumption “that policy rates are kept at current levels and that there is a limited rise in 2011,” he said. Conditions have become more supportive of slowing inflation since the last report in April, when the bank predicted rate increases starting in the last three months of this year, he said.
Yilmaz placed “greater emphasis on downside risks to the global economic recovery, with specific reference to the euro zone,” Ilker Domac, an economist for Citigroup Inc. in Istanbul, wrote in a report. “We now expect the bank to keep rates on hold at 7.0 percent until the end of the first half of 2011, which will be followed by a 150 basis point rate hike in the second half, bringing the policy rate to 8.5 percent by the end of 2011.”
Yields on benchmark two-year lira debt fell 2 basis points, or 0.02 percentage points, to 8.18 percent in Istanbul at 3:37 p.m. The lira was little changed at 1.5120 per dollar.
Shares Increase
The main ISE National 100 share index climbed 1.9 percent to 60,662.13 at 2:25 p.m. in Istanbul, the highest level since at least January 1990, according to data compiled by Bloomberg. Lenders Turkiye Garanti Bankasi AS and Akbank TAS led gains.
“Lower inflation means the central bank won’t raise interest rates, and banks will benefit from it this year,” said Altug Dag, a trader at EFG Istanbul Securities. “Improved bank earnings expectations are also adding to gains.”
Inflation will probably end next year at 5.3 percent compared with a previous forecast of 5.4 percent, Yilmaz said. The rate was 8.4 percent in June. Inflation will probably slow this month and accelerate in August, he said.
Yilmaz ended a 13-month series of rate cuts in December that slashed the benchmark by a total of 10.25 percentage points. The rate is 7 percent and the bank next meets to discuss monetary policy on Aug. 19.
He said the passage by the government of a fiscal rule limiting deficits would be important for keeping inflation in single digits.
The legislation “is necessary for Turkey and the government must keep its word on the legislative process,” he told reporters after his speech.
To contact the reporters on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net; To contact the reporter on this story: Ali Berat Meric in Ankara at americ@bloomberg.net
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