Weak lira could knock Turkish bank off targets

ANKARA / Reuters

Weakness in the Turkish lira could start to drive up prices and knock the central bank off its targets in the first quarter of next year, but the impact will depend on the pace of economic activity, Governor Murat Cetinkaya said.
At a news conference on the central bank’s monetary and exchange rate policy for 2017, Cetinkaya said the impact of forex volatility on inflation had so far been limited, but said
the upwards risks to prices had
increased.
The lira has hit a series of record lows in recent weeks, hit by a resurgent dollar as well as uncertainty about the outlook for Turkey’s domestic politics and security. The bank’s rate hike last month, its first in almost three years, has done little to ease the pain.
Cetinkaya said that the forex
“pass-through” — a measure of how sensitive prices are to changes in exchange rates — will depend on domestic demand and economic activity.
He said the bank would maintain its cautious monetary policy and that its interest rate decisions in the period ahead would continue to be dependent on the inflation outlook.
Cetinkaya expected a pick-up in economic activity in the final quarter of this year and forecast that the contribution of exports to growth would increase in 2017, noting that a normalisation in ties with Russia would have a positive impact.
He saw an upside risk to the bank’s 7.5 percent inflation forecast this year, including from tax hikes on tobacco and other products.