Earlier this month the Central Bank of the Republic Turkey (CBRT) raised its end-2017 inflation forecast to 8.7 percent from April's forecast of 8.5 percent and January's forecast of 8.0 percent.
However, the CBRT still expects inflation to ease to 6.4 percent next year before stabilizing around its 5.0 percent target in the medium term.
"Current elevated levels of inflation and developments in core inflation pose risks on the pricing behavior," the central bank said as it omitted July's reference to disinflation from improved costs and a partial correction in food prices.
In August Turkey's headline inflation rate rose to 10.86 percent from 9.79 percent in July while core inflation rose to 9.6 percent from 9.2 percent.
As in recent months, the central bank underlined it will maintain a tight policy stance until there is a "significant improvement" in the outlook for inflation and will tighten policy, if needed.
While the CBRT has maintained its key one-week repurchase rate at 8.0 percent since November 2016, it has been tightening its policy stance by other means, such as raising other key rates, including the late liquidity lending rate, the rate it pays on local lenders' U.S dollar reserves and required reserve ratios in a bid to boost the value of the lira and slow down inflation.
The CBRT today upgraded its view of Turkey's economy and described economic activity as gaining strength in comparison with its previous policy statement in which it merely said data indicated "an ongoing recovery in economic conditions."
"Domestic demand conditions keep improving and demand from the European Union economies continues to contribute positively to exports," the central bank said.
Turkey's economy grew by 2.1 percent in the second quarter from the first quarter for annual growth of 5.1 percent, slightly down from 5.2 percent in the first quarter.
Turkey's lira has been firming steadily since hitting a historic low of 3.87 to the U.S. dollar late January. However, it has slipped this week and was trading at 3.46 to the dollar today, down from 3.41 at the end of last week.
But compared with the start of this year, the lira is still up 2 percent against the dollar.
The Central Bank of the Republic of Turkey issued the following statement:
"The Monetary Policy Committee (the Committee) has decided to keep the short term interest rates constant at the following levels:
a) Overnight Interest Rates: Marginal Funding Rate at 9.25 percent and borrowing rate at 7.25 percent,
b) One-week repo rate at 8 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate at 0 percent, and lending rate at 12.25 percent.
b) One-week repo rate at 8 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate at 0 percent, and lending rate at 12.25 percent.
Recently released data indicate that the recovery in the economic activity has gained strength. Domestic demand conditions keep improving and demand from the European Union economies continues to contribute positively to exports. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.
Current elevated levels of inflation and developments in core inflation indicators pose risks on the pricing behavior. Accordingly, the Committee decided to maintain the tight stance of monetary policy.
The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."
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