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Turkey Central Bank Raises Inflation Forecast, Pledges Tight Policy

Updated on
  • Year-end inflation prediction raised to 8.7% from 8.5%
  • Inflation rate was 10.9% in June; long-term target is 5%

Turkey’s central bank raised its inflation forecast for this year on higher food prices, and reiterated its policy not to loosen monetary conditions until the outlook improves.

The bank revised its prediction for year-end inflation to 8.7 percent from 8.5 percent and maintained its forecast for 2018 at 6.4 percent, according to its quarterly inflation report. Food prices, which make up a fifth of the inflation basket and rose more than 14 percent through June, were the main reason for the change, Governor Murat Cetinkaya said in a press conference in Ankara on Tuesday.

“Monetary policy will remain tight until there is a noticeable improvement” in the main price indicators, Cetinkaya said, adding that the bank “will not react to temporary fluctuations in the headline inflation rate.”

The lira initially strengthened after the data, before swinging back to a loss against the dollar. It was trading 0.1 percent lower at 3.5229 per dollar at 13:38 p.m. in Istanbul. The yield on Turkey’s two-year lira notes fell after the governor’s remarks.

Turkey’s consumer inflation rate was 10.9 percent in June, well above the regulator’s long-term target of 5 percent. It probably slowed to 9.9 percent last month, the lowest level since January, according to the median estimate in a Bloomberg survey. The data is due on Thursday.

Tight Conditions

“Governor Cetinkaya may be signaling that they will not loosen monetary policy following the July inflation figures” said Ibrahim Aksoy, investment strategist at Istanbul-based HSBC Asset Management. “The central bank expects the drop in July inflation to be temporary according, to the inflation report.”

Following the bank’s decision to hold all main interest rates unchanged last week, Cetinkaya’s latest remarks show that loosening liquidity conditions remains out of question, according to Ziraat Bank economist Bora Tamer Yilmaz, who attended the governor’s briefing.

“Market participants will see this as a commitment not to cut interest rates anytime soon,” Yilmaz said.

Cetinkaya said food-price inflation would drop to 10 percent by the end of this year, still above his earlier forecast of 9 percent.

Higher use of production capacity also contributed to the inflation forecast revision. Lower import prices in lira terms and the government’s decision to forgo a routine tax increase on tobacco products offset some of that impact, Cetinkaya said.

(Updates with analyst comment in sixth paragraph.)
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