Turk energy hikes worry

ISTANBUL (Reuters) – Turkey’s central bank said yesterday planned hikes in electricity and natural gas prices led the bank to take a cautious stance on monetary policy. «The risks concerning possible secondary effects from planned price hikes in electricity and natural gas are a cause for the board to be cautious (on monetary policy),» the bank said in the minutes of its last Monetary Policy Committee meeting when it cut its benchmark borrowing interest rate by an expected 50 basis points to 15.75 percent. The government said earlier this week it would raise electricity prices by 15 percent for households and 10 percent for industry after steady prices for several years. It is also expected to raise natural gas prices. The central bank said food prices remained an important risk to inflation, which is expected to come in at double the bank’s 4 percent target for 2007. However, in the minutes, the bank also said overall food prices were expected to normalize in the medium term after expected increases in processed food prices in the short term. Central bank Governor Durmus Yilmaz said later yesterday planned energy price hikes would increase Turkey’s inflation by 0.5 percentage points in 2008. The bank has a 4 percent inflation goal for 2008. Yilmaz said in a statement that the rigidity in service price inflation has started to soften and the bank had created a new non-food price index to calculate inflation figures without effect from supply-side shocks. The bank said monetary policy must be backed by structural reforms for inflation to be reduced permanently. «The developments on structural reforms which will upgrade quality of fiscal discipline are being monitored closely both for macroeconomic stability and price stability,» the bank said. The government pledged to pass a key social security reform, which aims to cut a yawning welfare deficit and raise retirement ages, through parliament in January.