According to the 2010 first quarter inflation report presented by Central Bank of Turkey President Durmuş Yılmaz in Ankara on Tuesday, inflation targets for 2010 were revised upward, with a target, at 70 percent probability, between 5.5 and 8.3 percent, with a midpoint of 6.9 percent. The final inflation report of last year predicted that inflation for 2010 would be between 3.9 and 6.9 percent, with a midpoint of 5.4 percent.
The new targets represent a hike of between 1.4 and 1.6 percentage points. The report assumed that the central bank would keep interest rates at their record-low levels for a “long period” and would keep them at single-digits for the next three-years, and that even with the low policy rates, there would not be significant long-term pressure on inflation. The tax hikes implemented in January, the report added, would add 1.5 percentage points to 2010 inflation rates, up from the 0.5 percent previously estimated in October. The impact of these tax hikes, according to the bank, will be seen immediately this month, but will mostly disappear by January 2011. Oil prices, which increased during the last quarter of 2009, were above the $70 per barrel expectations of the central bank and thus pushed the forecast up 0.2 percentage points.
Unprocessed food prices also increased significantly in the last quarter, leading to an upward revision in expected food inflation from 6 percent to 7 percent, adding another 0.3 percentage points to the 2010 inflation forecasts.
The report noted that the forecasted increases in inflation were only short term and that no major changes to medium-term forecasts nor the monetary policy stance of the bank were needed “since economic activity has evolved in line with the outlook presented in the October Inflation Report,” the report said. The short-term forecasts were, however, revised upward as all the main short-term variables increased, such as food, energy and administered prices. “It is crucial that economic agents,” the report stressed, “fully understand the temporary nature of these developments while forming their medium and long-term expectations.”
Base effects, or the effects on the rate of inflation stemming from the previous year’s inflation rate, would also be an important factor of short-term high inflation in the second quarter of 2010, as the effects of the downward pressure on prices during the global economic crisis unwind. Inflation hit 6.53 percent at the last quarter of 2009, according to the report, due to rising commodity prices and the withdrawal of special consumption tax (ÖTV) stimuli in the third quarter of 2009.
Yılmaz warns of upward risks
Answering questions from the press regarding whether Turkey is equipped to handle an inflationary risk in the coming period, Yılmaz stated: “To this day we have not had to use an unorthodox monetary policy, and we will be continuing with the current policies we have. If an inflationary threat comes about, we have enough play in our interest rates to handle any problems, but we can use other instruments to deal with it before changing interest rates. … We don’t have a situation on our hands today that will require us to change our monetary policy stance.” He added that there are both upward and downward risks for inflation, but that the upward risks were recently becoming more apparent. “If needed, we will not hesitate from doing what is necessary to ensure price stability,” Yılmaz stressed.
