On Sept. 19 the central bank began cutting interest rates once again after a long gap since the last cuts in May and June of 2006, when global economic turbulence resulted in a significant rise in consumer price inflation (CPI). The central bank reduced overnight borrowing rates by just a quarter, indicating a positive trend in the future course of CPI. Soon after the central bank decided to cut interest rates, the US Federal Reserve cut rates by half a point, exceeding the expectations of analysts.
As a matter of fact, at the end of this last September CPI was at 7.12 percent thanks to the a monthly inflation rate of 1.03 percent -- slightly below expected figures.
According to the central bank's disinflation program for 2007, the upper limit for CPI is 7.3. With the actual annual inflation rate having stayed below this limit, the central bank's disinflation strategy was strengthened. Aside from two consecutive months of rises in CPI beyond the upper limit in the third and fourth months of 2007, the central bank's forecasts have been pn the mark since August 2006 (see figure).
Observing these recent developments, it could be argued that the central bank's understanding of the global economic environment has been quite adequate and that, therefore, the overall credibility of the bank has increased.
After all these developments where are we now for the rest of the year regarding further interest rate cuts and the disinflation program?
As the recent inflation data has shown, there have been favorable developments, primarily in the services sector (the most rigid area of inflation in recent years): there has been modest recovery in domestic demand and growth is to be slowed down both in Turkey and in other world economies due to developments in global financial markets.
Under those conditions the July 27 inflation report (see below) estimates that there is a 70 percent probability that the annual inflation rate will turn out to be between 5.1 percent and 6.9 percent at the end of 2007 and between 1.5 percent and 4.9 percent at the end of 2008. This means that the process of Turkey's successful disinflation program is to be restored once again, provided developments in the fiscal sectors allow it to.
