The Central Bank of Turkey (CBRT) lowered its end-2015 inflation forecast to 5.5% from a previous 6.1%.

The Central Bank published on January 27 its first inflation report of 2015 where it also said its end-2016 inflation forecast is 5%.

Inflation is expected to be, with 70% probability, between 4.1% and 6.9% (with a mid-point of 5.5%) at end-2015 and between 3.2% and 6.8% (with a mid-point of 5%) at end-2016, the Bank said adding that inflation is projected to stabilize around 5% in the medium term.

The Bank reiterated that inflation expectations, the pricing behaviour and other factors that affect inflation will be closely monitored and the tight monetary policy stance will be maintained by keeping the yield curve flat until there is a significant improvement in the inflation outlook.

The end-2015 inflation forecast is revised down by 0.6 points to 5.5% from 6.1% in the October Inflation Report and this revision is driven by falling oil prices, the Bank explained.

The course of inflation in 2015 will be determined by base effects, the Bank said, adding that base effects will pull annual inflation down until August and push it up in the rest of the year. The Bank expects annual inflation to remain on a downward track until the third quarter and increase slightly to 5.5% due to base effects in the fourth quarter.

Here are the other highlights from the Inflation Report:

Growth and demand conditions

* It is assessed that the annual loan growth rate will continue to hover around the recent reasonable levels in 2015, thanks to the macroprudential measures

*In 2015, domestic demand is expected to recover moderately while external demand is likely to remain weak

* CBRT expects the growth composition to change in favour of domestic demand in the upcoming period

*Depending on weather and precipitation conditions, the projected correction in the agricultural value-added will be a factor to support growth

*However, there are external-demand driven downside risks to growth

* Languishing external demand due to weak growth in European countries and geopolitical developments in neighbouring countries limits the growth of exports

*Thus, in 2015, demand conditions will contribute to the disinflation process and, backed by the macroprudential measures and the improved terms of trade, to the improvement in the current account balance.

Risks to growth

* The lingering volatility across global financial markets and the sluggish course of confidence indices may cause private final demand to provide limited support to growth

* Domestic economic activity may witness notable adverse effects

* Under such circumstances, the CBRT will employ policy tools to support the economy

Inflation outlook in 2015

* The recovery of economic activity is likely to be a gradual one and aggregate demand developments are expected to support disinflation

* The tight monetary policy stance and the macroprudential measures continue to have a favourable impact on inflation, especially on inflation excluding energy and food

* The adverse impact of cumulative exchange rate developments on annual inflation is tapering off

* Falling commodity prices, in particular oil prices, contribute to disinflation

Oil prices and food inflation

*Oil and import price assumptions for the medium term were revised significantly downwards

.*In view of the direct and indirect effects of these developments, the end-2015 inflation forecast was revised down by 0.6 percentage points compared to the previous reporting period.

*In food prices, the end-2015 inflation forecast was left unchanged at 9%.