Turkey’s Basci Says Fed Tapering Fears Causing Faster Inflation

Turkey’s central bank will keep monetary policy tight as long as inflation forecasts stay high over possible Federal Reserve tapering of debt purchases, Governor Erdem Basci said today in Ankara.

Basci revised the bank’s year-end inflation forecast today to 6.2 percent from 5.3 percent previously, citing lira volatility and rising energy import costs. Inflation accelerated to 8.3 percent in June, will probably peak around 9 percent this month, then gradually decline, he said.

“I would like to say openly that we will maintain this strong monetary stance until the inflation outlook is in line with our targets,” Basci said.

The lira has plunged since Fed Chairman Ben S. Bernanke said May 22 that he was considering reducing monetary stimulus, triggering a sellff in emerging-market assets, down 4.1 percent per dollar at 1:45 p.m. today. That, together with monthlong anti-government protests in June, have made the lira the second worst-performing emerging markets currency in Europe, Africa and the Middle East after Russia’s ruble. Turkey will have missed its year-end inflation target of 5 percent for a third year if consumer prices remain above target.

The bank in Ankara increased its overnight lending rate by 75 basis points to 7.25 percent on July 23, and said “additional monetary tightening will be implemented when necessary.” It kept its benchmark one-week repo rate and overnight borrowing rate unchanged at 4.5 percent and 3.5 percent respectively.

Near-Term Stability

The central bank expects the policy rate to remain unchanged at 4.5 percent in the near term, Basci said. The average cost of lending to banks since the July 23 rate decision has increased 49 basis points to 5.65 percent yesterday, and Basci said it may rise to 6.75 percent before peaking at 7.25 percent.

The central bank increased its forecast for the average price of Brent oil in 2013 to $107 a barrel from $103 a barrel earlier. The increased oil price expectations combined with the weakening lira accounts for nearly all of the 0.9 percent revision to year-end inflation forecast. Turkey relies on imports for almost all of its natural gas needs and more than 90 percent of its crude oil requirements.

Higher-than-expected inflation in the services sector accounted for the rest of the revision in the inflation forecast.

Inflation will decline significantly starting next February and will “approach” the 5 percent target mid-2014, Basci said.

“The lira is 5 percent below the level where it could be called overvalued,” Basci said. “Tight monetary policy will not be a problem since the lira is not overvalued.”

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