ANKARA – Bloomberg
Turkey revised next year's inflation target to 7.5 percent from 4 percent after an increase in energy and commodity 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, Economy Minister Mehmet Şimşek told in a letter sent to the Central Bank Governor Durmuş Yılmaz late Tuesday.
The Central Bank has struggled to bring the inflation rate down towards 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. �A major development by any standards, with the Central Bank taking the first step of a possible row of central banks,'' Simon Quijano-Evans, economist at UniCredit MIB in Vienna, said in a note to investors. �This is a reality check, and although it strongly dents policy credibility, it also stands as a courageous move to correct targets that were too stringent from the beginning.� Yields on lira-denominated bonds rose as much as 26 basis points to a 14-month high of 20.28 percent in Istanbul, according to data from ABN Amro. The Turkish lira (YTL) lost 1.1 percent against the dollar to 1.2405 at 1:26 p.m.
The government is committed to supporting the Central Bank in its inflation fight by paying down debt and preserving financial discipline, Şimşek said. It is also ready to take "precautionary measures" in the banking industry to ensure lower inflation rates, he said without elaborating.
Turkey may have acted too quickly to revise inflation targets, Christian Keller, an economist for Barclays Capital in London and former deputy chief of the International Monetary Fund's office in Turkey, said in an e-mailed note to investors. The bank may be required to raise interest rates more than originally planned to keep investor confidence intact. �We believe this move was premature, indicating limited ambition in terms of achieving disinflation,� Keller said. �While in the medium and long term, the central bank may hope this allows less restrictive monetary policy, we believe that on the back of this news, near-term hikes may be necessary to avoid further deterioration in expectations and a related decline in real rates.� 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 Tuesday. 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 Durmuş Yılmaz said in a letter to the government published late Tuesday on the bank's Web site. �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,� he said. The bank will adopt policies aimed at beating the new inflation targets and not just meeting them, Yılmaz added. Food and energy prices added seven percentage points to May inflation, the bank said in a report published yesterday. The inflation rate will probably remain high in the �coming months� due to the base effect from a year ago, the bank said. The rate should start to fall in the fourth quarter, it added.