Turkey's central bank maintained its short-term interest rates, including the benchmark one-week repo rate at 10.0 percent, highlighting the upside risks to inflation and repeating that the "tight monetary policy stance will be maintained until there is significant improvement in the inflation outlook."
The Central Bank of the Republic of Turkey (CBRT), which raised its rates by 550 basis points at an emergency meeting on Jan. 28 in response to a sharp drop in the lira currency, said inflation should continue to rise until June although its stance has helped contain inflation expectations.
Turkey's headline inflation rate rose to 7.89 percent in February from 7.75 percent, above the bank's 5.0 percent target.
In January the CBRT raised its 2014 inflation forecast by 1.3 percentage points, with the lira's decline accounting for an estimated 0.5 percentage points of the rise and higher taxes for another 0.5 percentage points.
At that time, the bank also forecast that inflation would ease in the second half of the year, ending the year at 6.6 percent and then stabilizing around the bank's target by mid-2015.
The central bank said growth of credit was continuing to slow in the first quarter in response to the tight policy stance, recent macro prudential measures and weak capital flows. Data for the first quarter of 2014 also show that demand was declining while exports should continued to rise, helping to a "significant improvement in the current account in 2014."
Turkey's Gross Domestic Product rose by 0.9 percent in the third quarter of 2013 from the second quarter for annual growth of 4.4 percent, marginally down from 4.5 percent in the second quarter. But unemployment rose to 10 percent in December, the sixth month of higher unemployment.
Turkey's current account deficit narrowed to US$ 4.880 billion in January from December's $8.322 billion.
Turkey's lira was hit hard in May 2013, along with many other emerging market currencies, and continued to fall through last year until Jan. 27 this year when it hit a record low of 2.37 to the U.S. dollar. The sharp rate hike helped ease the pressure on the currency, with it bouncing back to trade at 2.22 to the dollar earlier today, still down 3.1 percent this year.