Turkish Central Bank Expects Higher Annual Inflation, Monetary Tightening

Turkey’s central bank increased its inflation forecast for this year and said it foresaw “moderate tightening” in monetary policy to curb prices and reduce the widening current account deficit.

The central bank raised its forecast for consumer price inflation to 5.9 percent from 5.4 percent, governor Durmus Yilmaz said at a news conference in Ankara today. The 5.1 percent forecast for 2012 was left unchanged, he said. Inflation slowed to 6.4 percent last month, the lowest for a year.

The central bank says it’s tightening monetary policy on aggregate by increasing reserve requirements on banks to restrain lending. That offsets interest rate cuts in the past two months that have taken the benchmark to a record low of 6.25 percent, helping deter capital inflows and weaken the lira.

The higher inflation forecast reflects food and oil prices that are determined globally, and won’t deter the bank from its two-track policy, said Yarkin Cebeci, an economist at JPMorgan Chase & Co. in New York. He forecasts a 25 basis-point cut in the base rate next month “accompanied by further reserve requirement ratio hikes.”

The lira fell 0.2 percent to 1.566 per dollar at 2:35 p.m. in Istanbul. Yields on two-year bonds declined 4 basis points to 7.58 percent.

Rates May Not Increase

Tightening in monetary policy doesn’t necessarily mean higher benchmark interest rates and it’s too early to predict when the central bank might increase them, Yilmaz said. The inflation forecast is based on “moderate tightening in the policy mix in the remainder of 2011,” he said.

The bank increased its forecast for the price of oil to $95 per barrel, from a previous prediction of $85 for 2011 and $90 for 2012, Yilmaz said. Bank lending is expected to grow between 20 percent and 25 percent this year, and the bank is ready to take extra measures to control lending or inflation should they be needed, he said.

The credit boom fueled gross domestic product growth of about 10 percent in the first half of last year, slowing to an annual 5.5 percent in the third quarter.

To contact the reporter on this story: Ali Berat Meric in Ankara at americ@bloomberg.net.

To contact the editor responsible for this story: Aydan Eksin at aeksin@bloomberg.net.

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