Turkish cenbank sees inflation risks as it keeps rates steady

Turkey's central bank said inflation risks overshooting its year-end projection as it held rates steady for a second consecutive month on Thursday, signalling an upward revision to its outlook for prices.

Turkey's central bank said inflation risks overshooting its year-end projection as it held rates steady for a second consecutive month on Thursday, signalling an upward revision to its outlook for prices. The central bank had trimmed its year-end inflation forecast to 7.4% in April, but analysts said Thursday's statement indicated it would revise its forecast higher in its next inflation report on July 29.

The key interest rate was left unchanged at 8.25%, a level well below Turkey's annual inflation rate which rose to 12.6% in June, leaving real rates in negative territory. The bank said it maintained the view that demand-driven disinflationary effects will become more prevalent in the second half of the year.

"But risks to the end-year projection are considered to be on the upside due to recent realizations in inflation," it said. The bank had previously cut its policy rate in nine consecutive meetings from a level of 24% as it sought to boost an economy hit by a slowdown in 2019 and then the coronavirus pandemic.

As the economy recovers, people will be willing to spend more, which would lead to an increase in demand-driven inflationary pressure, said Piotr Matys, senior emerging markets forex strategist at Rabobank. "If Turks are more confident, if unemployment stops rising and people feel more secure about their jobs then they will start spending money again. That would prevent inflation from falling," he said.

The Turkish lira, which has weakened 13% against the dollar this year but remained largely flat for the last two months, was unchanged at 6.8475 to the U.S. dollar after the announcement. Analysts have raised concerns over the central bank's depleted forex reserves and only partial success in gaining access to foreign currency swaps, as the lira hit a record low in May.

Fallout from the pandemic brought Turkey's economy to a near stand-still in the second quarter. Most economists expect the economy to contract sharply this year. (Additional reporting by Ezgi Erkoyun Writing by Daren Butler; Editing by Toby Chopra and Dominic Evans)

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