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Turkish central bank leaves inflation forecasts unchanged

The Turkish lira had stabilized and the impact of exchange rate volatility on inflation had started to taper off from the second quarter

Published: Updated:

Turkey's central bank left its inflation forecasts unchanged for this year and next on Thursday and painted a rosy picture of the outlook for growth, the lira and the current account deficit in comments seen as signalling further rate cuts.

Governor Erdem Basci said the bank had left its mid-point forecast for 2014 year-end inflation at 7.6 percent in its latest quarterly report, unchanged from three months ago, although still well above its target rate of 5 percent.

It left the 2015 year-end inflation mid-point forecast at 5.0 percent, Basci told a news conference in Ankara.

Basci said economic activity would continue to strengthen in the second half, with domestic demand supporting falls in inflation, and said the current account deficit, 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 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 Basci ... this seems like getting ready for more cuts this year (which) will dovetail with the political calendar," said Timothy Ash, head of emerging markets research at Standard Bank in London.

Last week, the central bank trimmed its main interest rate for a third consecutive month but resisted the deep cuts sought by Prime Minister Tayyip Erdogan, hungry for growth ahead of a 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.

Basci said monetary policy nonetheless remained tight and this stance would continue, enabling the bank to keep inflation expectations under control.