Turkish CB leaves inflation forecasts at 7,6 percent

ANKARA (CIHAN)- Turkish Central Bank didn’t change its inflation forecasts for this year and painted a rosy picture of the outlook for growth, the strength of the lira and the current account deficit (CAD) in comments on Thursday that have been interpreted to be a signal of further rate cuts.

Governor of Turkish Central Bank Erdem BaII declared that the bank left its mid-point forecast for 2014’s year-end inflation at 7.6 percent in its latest quarterly report, which is unchanged from three months ago but still well above its target rate of 5 percent. At a news conference in Ankara, BaII said that the 2015 year-end inflation mid-point forecast left at 5 percent. He added that economic activity would continue to strengthen in the second half of 2014 with domestic demand supporting falls in inflation, and that the CAD

— Turkey’s main economic weakness — would continue to narrow.

The lira had stabilized and the impact of exchange-rate volatility on inflation had started to taper off starting from the second quarter, he said, with a recent drought keeping food prices high despite a downward trend in core inflation indicators. “This sounds like a dovish BaII. This seems like getting ready for more cuts this year, [which] will dovetail with the political calendar,” said Timothy Ash, the head of emerging markets research at Standard Bank in London.

“BaII said inflation maybe beyond the central bank’s control, so the bank may have to review the inflation target in 2015 up. So this is opening the way for much more rate cuts than priced in by the market,” Ash added. He said that it would still be a positive development to boost foreign portfolio flows and support the lira, but added that there are concerns about how an over-concentration of power around Prime Minister Recep Tayyip ErdoIan will impact on policy in the long term.

Last week, the central bank trimmed its main interest rate for a third consecutive month but resisted the deep cuts sought by ErdoIan, who is hungry for growth ahead of the Aug. 10 presidential election, in which he is standing, and parliamentary polls next year.

The bank cut its main one-week repo rate by 50 basis points to 8.25 percent, bringing the cumulative reduction to 175 basis points since May. BaII said monetary policy nonetheless remained tight and that this stance would continue, enabling the bank to keep inflation expectations under control.

The bank said global liquidity conditions were improving and the impact of a weak lira on inflation was tapering off.

Wedded to the idea that high interest rates cause high inflation, ErdoIan has repeatedly called for sharp cuts to reverse the central bank’s massive rate hike in January, when it was struggling to defend a tumbling lira. He has accused a foreign-backed “interest rate lobby” of trying to undermine him and the Turkish economy.

Despite the central bank’s determination to cut rates further, some economists said the inflation outlook did not justify a rate cut and warned that easier monetary policy could hinder the fight against rising prices and undermine the stability of the lira in the event of an aerse shock.

The central bank also said on Thursday that starting next month, the US dollar will be the only foreign currency accepted for lira-required reserves held by lenders, in a bid to reduce the impact of euro-dollar fluctuations on its balance sheet. Some lenders in Turkey currently hold a portion of their lira-required reserves at the central bank in euros. The central bank estimated that a total of 12.7 billion euros ($17.1 billion) in reserves would need to be exchanged for dollars. The central bank announces its reserves in dollars, meaning it is exposed to volatility in the euro-dollar exchange rate. It said the new requirement would take effect on Aug. 1.