UPDATE - Turkish Central Bank raises year-end inflation forecast

UPDATES WITH MORE QUOTES FROM CENTRAL BANK'S REPORT

By Bahattin Gonultas

ANKARA (AA) - The Central Bank on Wednesday raised Turkey's year-end inflation forecast from 8.7 percent to 9.8 percent amid increasing oil prices and depreciation in the Turkish lira.

Speaking at a news conference in Istanbul ahead of the release of the bank’s quarterly inflation report, Governor Murat Cetinkaya said price stability was vital and level of caution in the bank's monetary policy would be strengthened “if needed”.

"The bank's tight monetary policy stance will be maintained decisively," he said.

The governor said inflation rate will fluctuate between 9.3 percent and 10.3 percent through the end of 2017.

He said the mid-point would be 9.8 percent in 2017, up from 8.7 percent in the previous forecast.

"The rise in oil prices and the depreciation of Turkish lira elevated cost pressures in the third quarter," he said.

The Central Bank also increased its mid-point forecast for end of next year inflation to 7 percent from 6.4 percent in its July report.

"Inflation is likely to be 9.8 percent at end-2017, and stabilize around 5 percent in the medium term after falling to 7 percent in 2018 and 6 percent in 2019," he said.

For the upward revision 0.5 percentage points came from import prices and 0.4 percentage points came from output gap on stronger economic growth, Cetinkaya said.

He said the country's annual core goods inflation increased due to the Turkish lira’s depreciation against the foreign currency such as the U.S. dollar and euro.

- Tight monetary policy

One dollar traded for 3.77 Turkish liras on Oct. 31, up from 3.57 as of Sept. 29 marking a 5.6 percent monthly hike in the USD/TRY exchange rate. The average USD/TRY exchange rate was 3.66 in October and 3.47 in September, while the 10-month average rate was 3.61. The average USD/TRY exchange rate was 3.66 last month and 3.47 in September, while the 10-month average rate was 3.61.

The price of Brent crude has gained more than 30 per cent since June. Turkey is an oil importing country which was benefiting from lower oil prices in recent years.

The country's annual inflation rose to11.20 percent in September from 10.68 percent in August, according to a report from the Turkish Statistical Institute on Oct. 3.

On Oct.26, the bank kept its overnight lending rate, the highest of the multiple rates it uses to set policy, one-week repo rate, the marginal funding and overnight borrowing rates were also unchanged at 9.25 and 7.25 percent, respectively.

"Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement and becomes consistent with the targets," the bank added in its inflation report.

The bank also increased its oil price forecast to $53 per barrel, up from $50 in the previous report and to $55 from $53 for 2018.

"Accordingly, the monetary policy will aim to bring inflation down to 7 percent at end-2018 before gradually falling to 5 percent. Consequently, with the current reading of the data, this stance requires that the tight monetary policy be preserved until a convincing fall in the trend of inflation is reached," it said in the bank's inflation report.

"In recent years, sustaining fiscal discipline has been one of the key factors in lowering the sensitivity of the Turkish economy against external shocks.

“The room provided by fiscal discipline facilitated the implementation of an expansionary fiscal policy.

"Structural measures to provide room for counter-cyclical fiscal policies will enhance the coordination of monetary and fiscal policy, and improve macroeconomic stability," the report added.