Turkish Central Bank Cuts Year-End CPI Forecast 6.2%

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Central Bank of Turkey (CBT) (Ankara, Turkey) revised year-end inflation forecast down to 6.2% from 6.5% in the July Inflation Report, with regard to a decline in food and oil price assumptions. For the current year, the food price inflation forecast reduced from 7.5% to 7%, and the oil price forecast was reduced from $120 per barrel to $110, respectively.

While the updated output gap projections may have a marginal disinflationary impact going forward, CBT Governor Erdem Basci indicated that the revised consumer price forecasts broadly dismiss the disinflationary impact potential, as the 2013 consumer price index (CBI) projection was unchanged at 5.1%. These forecasts are based on a continuation of the cautious monetary policy stance, deceleration in loan growth to 14% by year-end (currently 15% year-over-year), and the fiscal policy remaining on track.

"We think that this is a reasonable and conservative forecast," said Yarkin Cebeci, an emerging markets economist at JP Morgan Chase in Istanbul. "Importantly, the forecast is based on a conservative oil price assumption of $110 per barrel. The forecast also assumes some more increase in food prices in the remainder of the year."

The governor hinted at a marginal increase in year-on-year consumer prices in July 2012, and reiterated that disinflation will gain pace in last quarter of the current year. Core inflation is expected to decline continuously during the rest of the year and stabilize at 5% in the medium-term.

The governor emphasized that the CBT will continue to maintain a cautious approach, keeping an eye on pricing behavior, as inflation will remain elevated over the next several months. The CBT's flexibility, through an interest-rate corridor that allows it to alter funding costs daily between 5.75% and 11.5%, helps manage volatile capital flows. The bank has been fighting to narrow the current account deficit, which ballooned in October 2012 to a record $78.3 billion. The Turkish Lira has gained some 3% against the dollar since the beginning of this year.

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