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Saturday, May 17, 2008

Turkish Central Bank Raises Base Rate in May

Turkey's central bank raised its benchmark interest rate by a half point this week, paring six cuts in the past nine months after the inflation rate reached a 12-month high and the government said it would loosen spending limits. The Ankara-based Turkiye Cumhuriyet Merkez Bankasi increased the overnight borrowing rate for the first time in almost two years to 15.75 percent, higher than any other rate in Europe.

The bank was forced to reverse its policy of cutting rates after rising global oil and food prices helped push inflation in April to 9.7 percent. Turkey will miss its inflation target, currently at 4 percent, for a third consecutive year, central bank Governor Durmus Yilmaz said on April 30.

The secondary impact of a weakening in the lira and rising global energy and food prices would create a ``temporary'' increase in the inflation rate, the bank said in a press release after the decision. The bank would take further ``measured'' interest rate increases if necessary.

The Committee expects inflation to start decelerating in the last quarter of the year, ending 2009 at around 6.7 percent, as forecasted in the April Inflation Report. In the forthcoming period, monetary policy decisions will be geared towards keeping inflation close to these forecasts. Therefore, it is important that economic agents align their expectations with the Central Bank forecasts. The Central Bank will continue to take the necessary measures to prevent the potential second-round effects of the adverse developments in food and energy prices.

Accordingly, the Committee will consider the possibility of a further measured rate hike in the next meeting. The extent and timing of possible future rate hike will depend on developments in global markets, external demand, fiscal policy implementation, and other factors affecting the medium term inflation outlook.

On May 3, three days after Yilmaz said the bank was poised to increase rates, the government announced it was loosening its budget targets to step up spending on infrastructure and job creation. A $10 billion International Monetary Fund lending accord designed to slow inflation by curbing spending expired on May 10.

The government is raising spending after the economy expanded 3.4 percent in the fourth quarter of 2007, the same pace as the previous three months and the slowest in almost six years.

If the bank wants to offset inflation by nudging the lira back up then it seems to be having some of the desired effect since the lira posted its biggest weekly gain versus the dollar since September last week. The lira rose to the highest level in two months against the dollar, rising 1 percent on Friday to 1.2315 by 6:40 p.m. in Istanbul, its strongest level since March 19. It advanced 2.8 percent over the week, in the process paring its deline of 5 percent so far this year.

Extract From the Central Bank April Inflation Report

Inflation Developments

Food, energy and other commodity prices continued to have adverse
effects on inflation in the first quarter of 2008. Oil prices continued to rise and
averaged around 100 USD per barrel. Annual food price inflation remained at
elevated levels, reaching 13.4 percent in March. Moreover, rising financial
volatility and declining risk appetite on the back of ongoing global uncertainties
have led to exchange rate movements which had first round effects on March
inflation. Consequently, inflation rose to 9,15 percent at the end of the first
quarter, breaching the upper limit of the uncertainty band.

As a consequence 6.13 percentage points of the 9.15 percent annual CPI
inflation in March resulted from the food and energy items. Annual inflation in
core goods and services remained flat over the previous quarter, confirming
that the rise in inflation can be mostly attributed to factors beyond the control
of the monetary policy. Annual inflation in CPI excluding food,
energy and tobacco items was at 4.8 percent at the end of the first quarter.

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