Posted by meb at April 28th, 2007

Turkish Central Bank Governor Durmuş Yılmaz has announced this year’s second inflation report yesterday.

It is forecast with 70 percent probability that the annual inflation rate will be within the range 4.5 to 7.1 percent, with a mid-point of 5.8 percent, at the end of 2007 — and within the range 1.3 to 5.0 percent, mid-point 3.2 percent, at the end of 2008.

The inflation projections increased by 0.7 points compared to the projections in first inflation report. To this end Yılmaz said these projections imply that meeting the medium-term target of 4 percent requires the maintenance of the tight monetary policy stance.

Annual inflation was 10.86 percent in the first quarter of 2007, remaining within the uncertainty band. The high course of annual inflation partly is due to elevated unprocessed food prices and hikes in the prices of tobacco products. Moreover, although the lagged effects of the exchange rate pass through have moderated, some cumulative impact still remains. The impact of monetary tightening on inflation, on the other hand, remains to be seen. Accordingly annual inflation stayed at high levels in the first quarter of 2007.

Yılmaz said the negative impact of the slowdown in domestic demand on growth is largely compensated for by robust external demand. Rising non-interest public expenditures was another factor retaining the slowdown in economic growth. Notwithstanding the positive stimulus from net foreign demand and public expenditures, the economy’s growth rate fell below the last five years’ average due to the considerable slowdown in private sector domestic demand.

Yılmaz said that the impact of monetary tightening in the second half of 2006 on the demand was visible, especially through the slowdown in expenditures on durable goods and machinery equipment. He said that the robust performance of exports had been offsetting the contractionary impact of the slowdown in private domestic demand and contributing positively to the economic growth rate. “Nevertheless uncertainties over the monetary transmission mechanism continue to be a risk in the medium-term inflation outlook,” he said, adding that while the recent hikes in public expenditures seemed to further blur the outlook, the proposed cut in certain non-interest public expenditure items had somewhat relieved these concerns. Yılmaz mentioned that a lower-than-expected impact of slowdown in domestic demand on inflation still remained a risk factor.

Yılmaz said that another risk related to the medium-term inflation outlook was the stickiness in inflation expectations and backward looking price setting which would lead to a higher-than-expected inertia in the disinflation process. The improvement in inflation expectations came to a halt in the last three months. Although the expectations should come down gradually as the headline inflation eases, the sticky medium-term inflation expectations remain to be a risk for the inflation outlook through its possible reflections on the price and wage setting behavior. The central bank governor also said during his speech that possible fluctuations in global markets remained a risk to the inflation outlook. The prevailing uncertainties in the US economy and on global imbalances still had the potential to trigger fluctuations in international markets which may have adverse impact on emerging economies. Moreover the elevated oil prices did not help to ease the risks related to global financial markets. On the other hand the Treasury’s strong cash accounts and the recent slowdown in the deterioration of the current account deficit have the potential to mitigate the impact of possible fluctuations in the financial markets.

Yılmaz said that price stability was essential for increasing the potential of the economy and achieving a high sustainable growth rate. Attaining the ultimate goal of price stability will only be possible with prudent monetary policy. “Economic agents should be patient in this process in order to reap the long-term benefits of price stability,” he said.

At the end of the meeting Yılmaz answered the questions from the press. He said they would react if the political developments affect the inflation rates. In response to question on the danger of “hot money” for the Turkish economy, he said he did not know of such a problem. He said the central bank was standing with its dignity and this dignity was gained with transparency and trustworthiness. “You can cheat the people only once,” he said. He also added, in response to a question, that there was not any dispute between them and the Turkish Statistics Institute (Turkstat).

source: Today’s Zaman