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Central bank raises 2014, 2015 inflation forecasts.

ySTANBUL (CyHAN)- Turkey's inflation will be higher than previously forecast this year and in 2015, although falling oil prices could temper its rise, the Central Bank of Turkey said on Friday, pledging to keep policy tight until the inflation outlook improves.

Presenting the bank's quarterly inflation report, Governor Erdem BaE-cy said inflation was now expected to be around 8.9 percent at the end of 2014, an upwards revision from a mid-point forecast of 7.6 percent in its July report.

BaE-cy cited higher food prices resulting from bad weather and lagged effects of currency depreciation as the main reasons for the change in this year's forecast. The bank sees food prices rising 12.5 percent this year, more than the 9 percent it had previously expected. The inflation forecast for 2015 was increased to 6.1 percent from 5 percent previously, while the bank's medium-term inflation forecast remained at 5 percent, BaE-cy said.

The new projections were lower than the inflation forecasts of 9.4 percent for 2014 and 6.3 percent for 2015 included in the medium-term program, unveiled by Deputy Prime Minister Ali Babacan on Oct. 8.

The bank revised downwards its oil price forecasts, to $102 per barrel for 2014 from $108 previously and to $92 per barrel for 2015 from $106. Furthermore, he said cheaper oil would limit upward pressure on inflation for this and next year. Turkey imports almost all its energy.

Inflation has remained stubbornly high even though interest rates are considerably above their levels of a year ago. The central bank left its key rates unchanged at its latest policy meeting last week.

Despite a downturn in foreign demand for Turkish exports, BaE-cy was still optimistic the Turkish export picture. "In the third quarter, risk premium indicators for Turkey resembled those of other developing countries. After the first quarter, the momentum of economic activity slowed down a fair amount. Slowed growth in the European Union along with geopolitical developments have limited external demand. In spite of this weakened demand, exports continue to support balanced growth," BaE-cy stated.

"With the continued decline in cumulative exchange rate effects, the return of food inflation to the average level of previous years and the fall in commodity prices, especially oil, inflation is forecast to record a notable decrease in the upcoming year," he maintained, adding that a measured rate cut could be on the agenda in the coming period if global conditions allow a significant decline in long-term interest rates and in inflation.

"The monetary policy stance should remain tight in order to bring the inflation outlook in line with medium-term targets," said Finansbank economist GE[micro]kce Ecelik in a note.

"Consequently, the inflation outlook is still far from justifying easing interest rates, in our view. Having said that, we cannot rule out an attempt by the central bank to cut rates going forward, especially if global conditions ensure lower global interest rates."

BaE-cy also said he does not believe the lira is overvalued at current levels, after the currency's real effective exchange rate rose in September.

The lira firmed slightly to 2.1967 against the dollar by 0847 GMT, from 2.2020 on Thursday. It traded at 2.1995 by 0950 GMT. The main share index was up 1.32 percent at 80,962.10 points. The 10-year benchmark bond yield fell to 8.62 percent from 8.75 percent on Thursday.

(Cihan/Today's Zaman) CyHAN

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Publication:Cihan News Agency (CNA)
Date:Oct 31, 2014
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