Turk gov’t spending worries
ISTANBUL – The Turkish central bank said yesterday a recent rise in government spending and uncertainty over the delayed impact on demand of recent interest rate hikes were risks to inflation. In the minutes of its last Monetary Policy Committee (MPC) meeting, the bank also said stubbornly high service sector prices at the start of 2007 added to threats to the medium-term inflation outlook. «The uncertainty concerning the lagged effects of monetary policy on aggregate demand still remain a risk to the inflation outlook… The recent increase in government spending adds to this uncertainty,» the bank said. But Finance Minister Kemal Unakitan, asked about the central bank’s views, said the government, which faces two elections this year, was sticking to its budget. «We are carrying out budgeted spending. Sometimes we might make expenditures before they are scheduled, perhaps that is what they mean, I don’t know. But at the moment we are not spending outside the budget,» he told reporters. «In short, we make no concessions on fiscal discipline,» he said. At its monthly meeting on March 15, the bank left key interest rates unchanged, as markets expected, keeping the overnight borrowing rate at 17.50 percent and the lending rate at 22.50 percent. The minutes said second-quarter growth rates were expected to be low due to base effects from a year earlier, while inflation should begin gradually falling in the second quarter after rising in March. «A one-off rise in March annual inflation… will not change the medium-term inflation outlook and hence will not play an important role in the decision-making process,» they said. March inflation data will be announced on April 3 and according to a Reuters poll is expected to show the consumer price index (CPI) rising 0.96 percent month-on-month, pushed higher in part by a rise in government-administered prices such as telecoms tariffs. Analysts said the minutes did not change the outlook. «There is no change in our view that the MPC will keep rates unchanged until the final quarter given sticky services prices, a credibility deficit, looser fiscal policy, pent-up administered price hikes and potential lira weakness due to a massive external imbalance coupled with global and domestic uncertainties,» Finansbank’s Inan Demir said in a note. The bank reiterated after its MPC meeting that a tight policy stance was needed in the light of global economic uncertainty, service sector price risks and the continued disparity between inflation expectations and official targets. The central bank targets inflation for the end of this year at 4 percent, a goal which analysts regard as very ambitious. Turkey’s real interest rates are among the highest in emerging markets. The central bank hiked borrowing rates 425 basis points last year in response to rising inflation and a 25 percent slide in the value of the lira.
