ECONOMY

Turk worries on inflation

ANKARA – Turkey’s central bank said on Friday it may need to tighten monetary policy to reach a 4 percent inflation target next year after sharply overshooting this year’s goal, largely due to high energy prices. The lira currency lost up to a quarter of its value against the dollar in May and June after higher-than-expected April inflation. A general emerging markets sell-off and domestic politics have contributed to investors leaving Turkey. The currency has partially rebounded after the central bank was forced to raise borrowing rates by 400 basis points and lending rates 600 points last month, taking overnight lending rates to 22.5 percent. The bank has also launched lira deposit purchase auctions and dollar sales auctions to rein in inflation and support the lira. The central bank said in a letter to the International Monetary Fund (IMF) and the Turkish government, which was obtained by Reuters, that inflation had a 70 percent chance of being between 9.1-10.5 percent in 2006, well above its official 5 percent target. The rise in consumer price inflation in June took the annual increase to 10.12 percent. The bank also said inflation for next year had a 70 percent chance of being between 3.5 and 7 percent, but stressed that more tightening may be needed to reach the 4 percent target. «If it is considered that these projections are taken under the assumption of fixed interest rates, then some more tightening may be necessary for meeting the 4 percent target,» the central bank said. «Under a cautious monetary standing, medium-term targets are attainable,» the bank said. But it also said that inflation would deviate from the target in the event of big external shocks. «The possibility of continuous crude oil price increases remains an important risk on inflation,» it said. The central bank will take the appropriate reaction if oil prices – which are trading at record highs of around $78 a barrel – start to hurt medium-term inflation expectations. Analysts said the central bank statement might signal more interest rate hikes. «The central bank report suggests more tigthening may be required to meet its consumer price inflation target. This is in keeping with our expectactation of a further 125 basis points in tightening in August-September to 18.5 percent,» said David Ross at 4Cast. Turkey has seen a return to strong economic growth on the back of an International Monetary Fund program following a 2001 financial crisis. Turkey’s economy is expected to grow 5 percent this year after an expansion of 7.6 percent last year.