Weak currency drove inflation over forecast: Turkish CB

ANKARA

Inflation in Turkey hit 8.53 percent last year, exceeding the predicted rate of 5 percent, according to a public letter from Turkey's Central Bank to Deputy Prime Minister Mehmet Simsek.

The letter was released on Turkey's Central Bank website on Tuesday.

The Central Bank cited rising tax adjustments, wage increases, and the depreciation of the Turkish lira as the reasons for the inaccuracy of the forecast.

"The large minimum wage raise in early 2016 pushed the overall wage level higher, which affected consumer prices through both cost and income channels, while the special consumption tax adjustments for tobacco, alcoholic beverages, fuel, and automobiles had a negative impact on inflation over the year," the letter stated.

The bank said that the Turkish lira and highly volatile exchange rates affected inflation not only through first-round cost pressures but also through expectations and the overall pricing behavior.

Last year the lira lost nearly 20 percent of its value against the dollar.

But according to the bank, the initial effects of its monetary tightening have been extremely powerful. "Owing to Central Bank policies, the depreciation trend in the Turkish lira has come to a halt and the yield curve has flattened," it said.

The letter added that the bank will continue to use all tools at its disposal to achieve the main objective of price stability.

"By closely monitoring inflation expectations, pricing behavior, and developments in other factors affecting inflation, additional monetary tightening may be implemented if deemed necessary. Moreover, necessary measures will be taken against unhealthy price formations in the foreign exchange market that are inconsistent with economic fundamentals."

On Tuesday, the Central Bank increased its forecast for inflation at the end of 2017 to a mid-point of 8 percent, from 6.5 percent in its previous report, and it forecast that inflation at the end of next year would stand at 6 percent.