Central Bank Governor: Turkey is in disinflation process.

By bne IntelliNews May 27, 2014

Turkey is in a disinflation process, the Central Bank governor, Erdem Basci, said on Monday in a presentation, adding that inflation fluctuations are largely due to volatility in international capital flows.

Exchange pass-through is one of the main drivers of inflation fluctuations and the other main determinant of inflation volatility is the credit cycle, according to Basci. The governor also noted that inflation expectations remain stable but are above the target.

Consumer prices rose 1.34% m/m in April (market consensus forecast: 0.88% m/m). Annual inflation, consequently, accelerated to 9.38% in April from 8.39% in the previous month. The Central Bank expects inflation to peak in May and ease to be closer to 5% next year as monetary tightening takes effect. The Bank’s official inflation target for 2014 is 5% but it raised its 2014 inflation forecast to 7.6% from a previous 6.6%. The Bank has said that it would keep monetary policy tight until there is a significant improvement in the inflation outlook. Last week, the Bank cut the one-week repo rate to 9.5% from 10% in a surprise move. It kept the overnight borrowing and lending rates on hold at 12% and 8%, respectively.

On a related note, PM Recep Tayyip Erdogan sharply criticised the Central Bank’s policies and the rate cut the Bank delivered last week and, saying that the cut did not go far enough.

The Central Bank is independent but he disapproves the Bank’s interest rate policy, Erdogan said. When the Bank raised the rates, it raised them by 5 percentage points but when the Bank cut the rates, it lowered the rates by only half a percentage point; this must be a joke, Erdogan reportedly told journalists, according to the daily Sabah. High interest rates are the main obstacle before investments and high rates are the main reason for high inflation, Erdogan commented.  Erdogan’s frequent criticism of the Central Bank is seen as political interference.

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