Turkey’s central bank expects inflation to keep falling in 2005

ISTANBUL (Reuters) – Turkish inflation is expected to end 2005 in line with an official target of 8 percent, the central bank said yesterday in a report detailing its reasons for making an unexpected rate cut this week. In a report on the inflation outlook, the bank said inflation may rise in January due to seasonal factors and with major sectors expected to make price adjustments. The report said the introduction of the new Turkish lira on January 1, wiping six zeros off the existing currency, was expected to have only a limited impact on prices, but base effects would boost inflation in the first few months of the year. «There may be hesitancy in the fall in inflation in the first four months of 2005. But inflation will begin falling again from May and is expected to end the year in line with targets,» the report said. The bank cut the overnight borrowing rate to 17 percent from 18 percent and the lending rate to 21 percent from 22 percent. It previously lowered rates on December 20, reducing both rates by two Turkish financial markets, which rallied on Tuesday in the wake of the rate cut, eased back yesterday. The main share index fell 0.3 percent, the new lira weakened against the dollar, while bond yields fell slightly. Raymond James chief economist Ozgur Altug said base year effects in inflation could have an impact on the prospects for interest rates this year. «According to our projections, the unfavorable base year would be with us in the first seven months of the year, which could curb the central bank’s appetite to cut interest rates,» Altug said. «Despite the recent interest rate surprise, we believe that the central bank would not be able to act as aggressively as it did in 2004,» he said, forecasting a cut in the borrowing rate to 15 percent by the end of the year. Turkish inflation fell to 9.32 percent in 2004, its lowest level in some 30 years.

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