Country Report Turkey January 2011

Outlook for 2011-15: Monetary policy

We foresee no major change in the operational independence of the Central Bank of Turkey or its conduct of monetary policy in 2011-15. However, the term in office of the current governor, Durmus Yilmaz, expires in April 2011 so the government's choice for the post will be closely watched. Recent concerns about the impact on financial stability of strong capital inflows have resulted a shift in the Central Bank's interest rate policy. After the Central Bank cut its key interest rate, the one-week repo (repurchase) lending rate, by 50 basis points to 6.5% on December 16th 2010, we now expect a further 50-basis-point cut in January 2011, possibly followed by another in February, after which the policy rate will remain on hold until late 2011, when we expect interest rates to have to start to rise and possibly more sharply initially than previously forecast (150-200 basis points) because of the lower base. We expect that the decision to hike reserve requirements will help to curb the potential impact on inflation from lower interest rates and a weaker lira. However, there is a risk that the rate cuts will stimulate domestic demand further and push up inflation. We do not expect the Central Bank to change to its consumer price inflation targets set in agreement with the government on a rolling three-year basis. They are (±2 percentage points) 6.5% by end-2010, 5.5% by end-2011 and 5% by end-2012.

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