Turkey central bank head expects inflation to slow

The bank now forecasts 8.9% year-end inflation, up from 7.4% in its previous quarterly report


ISTANBUL - Turkey's central bank, under pressure from rising prices and a volatile drop in the lira, ratcheted up inflation forecasts on Wednesday, but its chief remained optimistic that disinflation would soon return.

Governor Murat Uysal also downplayed concerns about the bank's depleted FX reserves, which he said would naturally fluctuate during a pandemic. He did not address a drop of as much as 1.5% in the currency this week that could put more pressure on that buffer. 

The bank now forecasts 8.9% year-end inflation, up from 7.4% in its previous quarterly report, assuming there is no second coronavirus wave. It expects inflation to dip to 6.2% by the end of 2021, up from a previous forecast of 5.4%.

Economists generally expect higher inflation by year's end, after it edged up in the last three months to 12.6% in June.

Analysts are split over whether the central bank could pivot to monetary tightening to address stubbornly high prices and a real rate that has been driven into negative territory by an aggressive year-long easing cycle.

The bank halted rate cuts in June and held policy steady this month. Uysal said policy was in line with the inflation forecast.

As pandemic-related demand for goods gradually eases and things return to normal, he said, "inflation will enter a falling trend beginning in July."

Turkey has recorded nearly 230,000 COVID-19 cases and containment measures are expected to shrink the economy this year.

The lira, which tumbled this week against the dollar after two months of trading flat, was off 0.2% after the quarterly report and brief news conference.

Uysal said the bank -- which in past quarters had steadily downgraded inflation forecasts -- reversed course and raised them due in part to imports and food prices. A fall in goods and commodities should boost the current account balance, he added.

(Reporting by Ezgi Erkoyun and Ali Kucukgocmen; writing by Daren Butler; editing by Jonathan Spicer, Larry King) ((daren.butler@tr.com; +90-212-350 7053; Reuters Messaging: daren.butler.thomsonreuters.com@reuters.net))

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