Turkey's C.Bank defies overheating claims with inflation forecast

Erdem Basci made public an inflation report in Ankara, and said the bank's inflation projections had not changed.

Turkey's C.Bank defies overheating claims with inflation forecast

The Central Bank of Turkey has not changed its year-end inflation forecast and has signaled that its short-term repo and policy rates will not be raised until the end of this year.

This takes on claims that the Turkish economy is overheating after last year's growth period continued through this year and an interest rate hike was thought necessary to cool it down.

In its third inflation report for 2011, the bank said on Thursday that it expects consumer inflation will, with a 70 percent probability, be between 5.9 percent and 7.9 percent with a midpoint of 6.9 percent by the end of this year.

It also said the inflation in consumer prices will stabilize at 5 percent in the long term and is expected to be between 3.5 percent and 6.9 percent in 2012.

Announcing the findings of the report in Ankara, Central Bank Governor Erdem Başçı noted that their calculations are based on a crude oil price of $115 a barrel through the end of 2011.

The stock market and the Turkish lira reacted positively to the news. The İstanbul Stock Exchange (İMKB) benchmark İMKB-100 index opened 0.22 percent higher at 61,315 points on Thursday morning and reached 61,652 points by the end of the first trading session.

The lira strengthened against both the euro and the US dollar. By midday, the euro was traded at TL 2.4032, or 1.15 percent less than the previous day. The US dollar likewise dropped 1 percent against Turkey's currency, coming in at TL 1.6757 by 13:00 local time (GMT +2).

The yield of Turkish bonds has also declined. The interest rate on the country's benchmark bond was at 8.82 percent -- 0.13 percent lower than Wednesday.

The Turkish Central Bank has implemented a policy of mixing lower interest rates with a higher reserve required for banks in order to strengthen fiscal stability and reduce the country's current account deficit (CAD).

Critics of this policy, which they term "unorthodox," argue that it has the potential to cost the country's economy dearly. They insist that it has overheated after five consecutive quarters of growth.

Still, most experts oppose that line of thinking, underlining that with 8.9 percent growth last year and another 11 percent in the first quarter of this year, Turkey has only recovered the losses it incurred by the global financial crisis in 2009.

They also point to the capacity utilization rate of the country's manufacturing industry and national employment that still sit below their pre-crisis levels.

Overheating economies are theoretically supposed to fall prey to their own success when they fail to finance the rate of growth they have maintained for so long, or more specifically, fail to solve difficulties balancing payments or achieving price stability.

The risk here is that the CAD could be too large to finance or there could be too much inflation.

Since most of Turkey's CAD comes from the indebtedness not of the public but of the private sector, and there is no apparent sign of difficulty on the part of private holders to meet their debt obligations on time, most experts say it does not pose a serious threat to the Turkish economy.

Likewise, since the inflation of consumer prices seems to remain subdued at a four-decade low, they say the Turkish economy shows no signs of overheating and agree that low interest rates are the best tools to ensure financial stability in the country.

On Thursday, Başçı was also vocal in praising the country's economic performance. He said the Turkish economy was doing "very well" and that the outlook was good despite the risks world economies are facing.

"We are at an advantage because we can implement balancing policies," he said. Başçı's remarks came a day after Prime Minister Recep Tayyip Erdoğan said the trouble in Western economies would leave the Turkish economy untouched due to the strength of the Turkish economy. Başçı said the prime minister's words were a "positive message" and "helpful" for the public.

Erdoğan's Justice and Development Party (AK Party) has been in power since late 2002, and having won the June 12 elections will remain in office for another four years.

The past eight years under the AK Party has brought decreases in Turkey's inflation, budget deficit and unemployment, and improvements to economic growth.

Turkey's CAD, on the other hand, spiked to 8 percent of its gross domestic product (GDP) because Turkish industries failed to reduce their dependence on foreign intermediate goods and rising oil and natural gas prices caused the country's energy bill to skyrocket.

Cihan news agency

Last Mod: 28 Temmuz 2011, 17:57
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