World Economic outlook - Turkey inflation rate forecast 2012 ; Central Bank of Turkey Governor Erdem Başçı has said Turkey is likely to have an inflation rate close to the targeted 5 percent next year as the upward pressure that emerged from a weaker Turkish lira and higher commodity prices eases.
In a press conference he held on Tuesday in Ankara to discuss the bank's monetary and exchange rate policy in 2012, Başçı also said the targeted inflation rates for 2013 and 2014 would also be set at 5 percent in line with the government's Medium-term Economic Program (OVP).
According to Turkish Statistics Institute (TurkStat) data, the annualized inflation of consumer prices increased to 9.48 percent in November from 7.66 percent a month before, inching closer to a double-digit mark by the end of this year. The annualized inflation of producer prices was even higher, at 13.67 percent as of November. Having realized the inflation target was too optimistic, the bank revised its year-end inflation forecast from 6.9 percent to 8.3 percent.
TurkStat cited the base effects on prices of processed food items and the weakening of the lira as the major factors behind the surging inflation. The base effect from hikes in October of the private consumption tax (ÖTV) on certain products -- such as cars, mobile phones, tobacco and alcoholic beverages -- along with soaring prices for crude oil in global markets are also responsible for November's high figures.
The bank, under Başçı's leadership, opted for monetary tightening to stem the rise in inflation and is now hopeful that its measures will yield a visible outcome sooner than later. “We will start seeing the impact of this tightening on inflation from the first months of the year,” he said Tuesday but cautioned that, “the annualized inflation rate will remain high for some more time because of the accumulated effects of exchange rate movements.” The US dollar and euro rose from TL 1.54 and TL 2.15, respectively, on Jan.1 to TL 1.89 and TL 2.47 recently. The price of crude oil, likewise, jumped from below $90 per barrel at the beginning of the year to $100 on Tuesday.
On the issue of lira's stubborn weakness against major currencies, Başçı said the bank has no exchange rate target and emphasized that Turkey has been applying a floating exchange-rate system since early 2001. The bank signaled on Monday that it is not yet too worried about the local currency's melt against the dollar and euro when it announced that the amount of dollars it sells to the market per day will not be increased to help the lira gain value. In a statement, the bank noted that it will continue with the $50 million daily sales it initiated over four months ago unless it becomes appropriate to make a more voluminous sale to maintain the lira's strength.
Flexibility vs. predictability
As part of his speech Tuesday, Başçı also noted that a central bank's monetary policy cannot be flexible and predictable at the same time in absolute terms, but it is certainly possible in relative terms, and this is what his bank is going to do next year. “As you all know, 2011 was a year during which both flexibility and uncertainty were intentionally increased. However, 2012 for us will be year when monetary policy predictability is raised with its flexibility is preserved,” the chief banker said. To that end, he pointed to the need for an effective communications strategy on the part of the bank. “I want to share with you that we are planning to implement some changes that will increase the effectiveness of our communications policy,” Başçı said.
As part of that improved communications strategy, the bank will continue to issue its quarterly inflation reports and announcements related to the monthly meetings of its Monetary Policy Committee (PPK). Those announcements contain the committee's decisions on a wide range of tools the bank uses, including the interest rates, together with a brief explanation for those decisions. The summary of the meetings that included detailed evaluations made will be posted to the bank's webpage both in Turkish and English. The bank will also continue to release its financial stability reports as well as the presentations made to the Parliamentary Planning and Budget Commission twice a year.
Maintaining financial stability core duty
On Tuesday, Başçı also elaborated on how important it is for the Turkish central bank to ensure and maintain the country's financial stability which was made one of its core duties with a legislative amendment in 2001. He said the bank will continue, as has been the case in 2011, to focus on financial as well as price stability in Turkey. In the face of Turkey's widening current account deficit (CAD), the central bank initiated a policy mix that includes lower interest rates and higher required reserve ratios late last year before Başçı was appointed governor. Inheriting a good corporate reputation from his predecessor Durmuş Yılmaz, Başçı also increased the full court pressure on interest rates while also increasing the amount of reserves banks must keep in the central bank's accounts without earning interest revenue. The measures aimed at making Turkey less attractive for highly volatile short-term capital inflows and it more difficult for people to take out bank loans. They appear to be successful in countering the rise of Turkey's CAD as the gap came down by nearly 35 percent in October compared to a month earlier.
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