Turkey Central Bank Raises Inflation Forecast to 8%

Turkey’s central bank said further tightening of monetary policy remains “on the table”, and that the lira’s rapid plunge has put the inflation target out of reach until 2019.

Inflation, driven by the weaker currency, will reach 8% at the end of 2017, up from the previous estimate of 6.5%t, Governor Murat Cetinkaya told reporters in Ankara on Tuesday. The potential for it to reach double digits at some point this year is an “important risk”, he said, Bloomberg reported.

In addition to raising a benchmark interest rate, the central bank has rolled out a series of unorthodox measures in recent weeks to bolster the lira, including using swaps to smooth volatility and forcing commercial lenders to borrow via the more expensive late-liquidity window. The steps have stabilized the currency and will be around “for some time”, Cetinkaya said.

Policymakers “seem to be content with the current level of policy tightness, but can increase if need be,” said Bora Tamer Yilmaz, an economist at Ziraat Bank in Istanbul. “The central bank seems to be taking the mounting inflationary pressure seriously.”

The lira traded 0.4% lower at 3.797 per dollar in Istanbul. It has lost about 7% this year, following last year’s 17% plunge.

The bank also revised its inflation forecast for 2018. It had forecast the year-end rate would meet its 5% inflation target, but now expects it to be 6%, Cetinkaya said.

Cetinkaya spoke days after Fitch Ratings cut its sovereign debt rating for Turkey to junk. Government-backed purges have extended beyond alleged members of a group blamed for July’s failed coup attempt, unsettling economic actors, Fitch said. Terrorist attacks have also damaged consumer confidence and tourism.

“Recent indicators suggest the 2017 recovery in domestic demand might be slower than we had forecast,” Cetinkaya said, adding that fourth-quarter data indicate only a moderate economic recovery from the third quarter contraction following the coup.

The bank’s eventual plan to simplify monetary policy remains in place, despite the recent measures to tighten liquidity, Cetinkaya said. The bank has said it wants to reduce the gap between the overnight lending and borrowing rates—the upper and lower bands of its so-called triple rates corridor—and use the one-week repo rate as the main funding tool.

Since Jan. 12, the central bank has issued no funding using the one-week repo rate, instead directing lenders to the late-liquidity window. At 11%, it’s higher than all three of the bank’s key rates.