Bank of Turkey unsure about further tightening measures

ISTANBUL (Reuters) – Turkey’s central bank announced yesterday it was too early to say whether the tightening measures it has taken were sufficient to reach its 2007 inflation target of 4 percent. In the minutes of last week’s Monetary Policy Committee (MPC) meeting the bank also said it saw a limited improvement in medium-term inflation expectations in August. The bank left key interest rates unchanged at the monthly MPC meeting last Thursday, contrary to expectations of a 25-basis point rate hike. The overnight borrowing rate remained at 17.50 percent and the lending rate at 22.50 percent. The central bank said previously in its inflation report that a moderate monetary tightening may be necessary in the second half in order to reach the 2007 target. «Committee members assessed that it was too early to give a signal that such an additional tightening had been completed,» the minutes said. «The committee took the view that it was necessary to maintain its cautious stance for some time to come in order to approach its end-2007 target,» it said. Turkey issues inflation figures for August on Monday. The bank also said the prices of goods such as fuels and gold, which are affected by foreign exchange rates, were expected to pull consumer price inflation in August, when annual inflation was seen falling. The bank said it expected a slowdown in the second half due to weaker domestic demand, but that this slowdown would not be dramatic. Annual growth in the industrial sector was also seen slowing from August to some extent, the minutes said. After the lira slid up to 25 percent in May and June, the central bank took measures to reduce lira liquidity in the market, and raised borrowing rates a combined 425 basis points and lending rates 625 basis points. The bank said the impact of these measures would be felt toward the end of this year and more so in the first half of 2007. The slide in the lira had been triggered by a sharper-than-expected rise in inflation, the impact of which was exacerbated by a sell-off in emerging markets and concerns about political uncertainty in Turkey. Funds have since begun flowing back into Turkey in response to the central bank action and an easing of the political worries. Backed by an International Monetary Fund program, Turkey has grown strongly since a deep financial crisis in 2001 and the economy is expected to grow 5 percent this year. Turkey’s consumer price inflation came in at 11.69 percent in July, way above a central bank target of 5 percent for this year.