Turkey's Central Bank revises up inflation forecasts

The Central Bank of the Republic of Turkey has raised its inflation forecast for 2015 by 1 percent, governor Erdem Basci said on Wednesday.

The bank predicts that inflation for this year will be 7.9 percent at year-end, up from 6.9 percent in the previous forecast.

Inflation in 2016 is forecast to reach 6.5 percent for the year, up from 5.5 percent in the previous forecast.

Basci said that the bank's tight monetary policy stance would be maintained until there is sufficient improvement in the inflation outlook.

Basci spoke at a press conference for the release of the bank's Inflation Report 2015-IV, which detailed the forecast for inflation, and the bank's monetary policy.

"In the third quarter of 2015, annual consumer inflation posted a quarterly increase of around 0.75 points compared with the previous quarter and rose to 7.95 percent, remaining above projections of the July Inflation report. Food prices and exchange rate developments are the main drivers of this rise in annual inflation," the report said.

"The contribution of the rise in prices for unprocessed food increased in the quarter," it said.

The Turkish lira has lost about 20 percent in value against the dollar this year.

"Annual core goods inflation posted an upsurge owing to the cumulative depreciation in the Turkish lira," the report said. This "pass-through" from the devalued currency helped push up inflation.

The underlying trend of core inflation indicators posted a slight decline compared to the previous quarter, yet remained at high levels, according to the report.

The report also cited volatile global financial conditions as a factor helping to determine monetary policy.

Volatility in global markets had repercussions also in the Turkish economy and financial indicators went through fluctuations amid domestic uncertainties. "In the third quarter, similar to other emerging economies, risk premium indicators and long-term rates in Turkey also increased," the report said.

"Medium-term inflation expectations and repercussions of wage developments on inflation will be critical for the inflation outlook over the upcoming period. The establishment of the Committee on Monitoring and Evaluating Food and Agricultural Product Markets has been an important structural reform regarding inflation. Against this background, inflation is expected to hover around current levels for some time due to exchange rate effects and start slowing down afterwards," the report said.

These factors lead to the central bank's tight monetary policy stance being maintained in the near future, the report said.

"Accordingly, inflation is expected to be, with 70 percent probability, between 7.4 percent and 8.4 percent (with a mid-point of 7.9 percent) at end-2015, and between 5.0 percent and 8.0 percent (with a mid-point of 6.5 percent) at end-2016. Inflation is projected to be close to 5 percent at end-2017 and to stabilize around 5 percent in the medium term."

- Road map for monetary policy

The central bank released a road map for monetary policy on Aug. 18. The report on Wednesday reaffirmed that plan, and gave further details.

"The width of the corridor will be narrowed and the interest rate corridor will be made more symmetric around the one-week repo interest rate," the report on Wednesday said. This refers to the two interest rates used by the bank: the one-week repo rate -- weeklong loans to banks -- and the overnight lending rate.

The central bank, which previously lent money to banks using both rates, will prioritize the one-week repo rate, currently at 7.50 percent, a process which the bank refers to as "simplification" in the report.

"During the simplification process, adjustments will be made in the funding composition to preserve the required degree of tightness in the monetary policy," the report said.

Further, the bank will adjust the supply of funds during the simplification process as needed.

"Sustained fiscal discipline has become a fundamental element in reducing the sensitivity of the Turkish economy against external shocks in recent years. In the current environment of highly uncertain global markets, the value added from maintaining and further advancing these achievements is significant," it added.