Turkey Central Bank Raises Inflation Target

Turkey revised next year's inflation target to 7.5 percent from 4 percent after an increase in energy and food costs pushed the inflation rate into double digits. The government also agreed with the central bank to set the inflation goal for 2010 at 6.5 percent and the target for 2011 at 5.5 percent according to Economy Minister Mehmet Simsek.

The Turkish lira and stocks fell, and bond yields rose following the central bank decision. Turkey's lira fell 0.81 percent against dollar to close at 1.24. The Istanbul stock exchange shed 1.53 percent of its value. Yields on lira-denominated bonds rose as much as 26 basis points to a 14-month high of 20.28 percent in Istanbul.

The central bank has struggled to bring the inflation rate down toward 4 percent because of record oil and food prices. Faster inflation prompted the bank to raise its benchmark interest rate by a half point to 15.75 percent last month, the first increase in almost two years.




The government is committed to supporting the central bank in its inflation fight by paying down debt and preserving financial discipline, Simsek said. It is also ready to take ``precautionary measures'' in the banking industry to ensure lower inflation rates, he said without elaborating.

Since coming to power in 2002, the governing Justice and Development Party has reduced the country's debt stock and budget deficit to levels that meet the European Union's Maastricht criteria for adopting the euro. Its policies have also helped attract record levels of foreign investment and cut the inflation rate to a low of 6.9 percent last July from more than 30 percent.

Turkey's inflation rate rose to a 14-month high of 10.7 percent in May from 9.7 percent a month earlier, the government's statistics agency said yesterday. The price of unleaded fuel rose 7 percent from April and food prices jumped 16 percent.




Higher inflation means the bank will maintain its ``tight stance'' on interest rates, governor Durmus Yilmaz said in a letter to the government published late yesterday.

``Food and energy prices continue to pose risks to the medium-term inflation outlook and there is no clear evidence that this trend will reverse in the short term,'' Yilmaz said.

The bank will adopt policies aimed at beating the new inflation targets and not just meeting them, he added. Food and energy prices added seven percentage points to May inflation, the central bank said in a report published today. The inflation rate will probably remain high in the ``coming months'' due to the base effect from a year ago, the bank said. Inflation should start to slow in the fourth quarter, it added.

The central bank's monetary policy committee will meet on June 17 to decide whether to revise the benchmark interest rate.