TCMB: Meeting inflation targets possible as oil prices fall
Posted by meb at January 30th, 2007
Reaching inflation targets for 2007 is a bigger possibility now considering the recent decreases in oil prices, said Durmuş Yılmaz, the governor of the Central Bank of Turkey (TCMB).
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“We have to continue a tight monetary policy to accomplish our middle-term target, which is to approach 4 percent inflation,” said Yılmaz. He emphasized that they reset oil price expectations at $55 per barrel rather than $60 and that they expect significant declines in inflation rates. The Central Bank’s monetary policies are aiming for 4 percent inflation by the end of the year. According to figures based on the probability calcularions, Yılmaz announced that expected inflation rate would be 5.1 percent in 2007 and 3.4 percent in 2008, with a 70 percent possibility. He said that the range in inflation would be between 3.6 percent and 6.6 percent in 2007 and between 1.6 percent and 5.2 percent in 2008. Yılmaz said they did not make many changes in expectations announced in the central bank’s November 2006 inflation report because the latest macro-economic developments were in accordance with the estimations in the report.
The resistance inflation is showing in declining more than expected is the main risk factor that can cause variances in the estimations, said Yılmaz. “In fact this resistance occurred in the inflation expectations of the service sector especially.” He said that tightening monetary policy would reduce domestic demand so that price inflation in services would decrease. “But, if we take into consideration the service sector’s low relative-efficiency and sensitivity to wages, it will remain as the main risk factor,” said Yılmaz.
He noted that the other risk in inflation expectations was ambiguity in the delayed effects of monetary policy on total demand. “We thought that the economic slowdown of the third quarter of 2006 occurred because of the fluctuations in financial markets and not because of tightening monetary policy,” said Yılmaz.
He said that the effects of tight monetary policy occurred recently but the duration and the depth of these effects has not been clarified. “Also ambiguity in public expenses is an uptrend risk factor on total demand and inflation,” said the president.
Yılmaz said that sudden fluctuations in global financial markets were another risk factor that could delay meeting inflation targets. “The structural reforms that will increase the quality of fiscal discipline in the middle and long run, are followed closely,” said Yılmaz. He pointed out that continuation of EU integration and implementing economic reforms still were of critical importance.
In response to a question about any possibility in revising the target, Yılmaz said “We will face a credibility problem if we change the target. If we change the target, our credibility will fall. Right now, we have the same problem in not changing it. We studied the possibilities, made a cost-benefit analysis and at the end decided that leaving the target as it is would harm our credibility less.” Yılmaz also criticized wage increases because they were badly affecting inflation targets. “We have to consider the target more than every other thing,” said Yılmaz. “But there is no difference between the government and us regarding the struggle against inflation. The government is paying considerable attention to primary surplus and our interest rate policies are contributing positively to the surplus.” Evaluating deviation from the inflation target last year, Yılmaz expressed his sorrow. “Yet being upset is won’t solve the problem. To finish the year with 9.65 percent is by no means an amusing thing,” said Yılmaz.
source: www.todayszaman.com
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