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UPDATE 2-Turkish central bank lifts 2021 inflation forecast, sees Q4 fall

·2 min read

(Adds quotes, lira, details, background)

By Ezgi Erkoyun and Ali Kucukgocmen

ISTANBUL, July 29 (Reuters) - Turkey's central bank raised its year-end inflation forecast to 14.1% on Thursday, bringing it closer to but still below market expectations as the bank's governor predicted inflation would fall significantly in the fourth quarter.

Governor Sahap Kavcioglu, presenting the central bank's quarterly inflation report, lifted the year-end forecast from 12.2% in the previous report and hiked the end-2022 inflation forecast to 7.8% from 7.5%.

A Reuters poll this week showed economists expect inflation, which rose to 17.53% in June, would hit 18.5% in July and remain elevated at 16% at the end of 2021.

"Inflation may follow a volatile course in the summer months. Our monetary policy stance is tight enough to prevent these volatilities being reflected in the main trend," Kavcioglu said.

Turkey's lira, which has weakened 14% this year, firmed 0.6% to 8.49 to the dollar as he spoke, its strongest level since mid-June. The governor said the bank aimed to strengthen the lira and was working to build its reserves.

Kavcioglu said inflation was in the top range of expectations last month and structural issues behind it need to be solved and steps taken to increase competition.

He said the bank would decisively maintain a tight stance until a lasting fall in inflation is achieved, but monetary policy alone was not enough to fight inflation, saying it needed to be coordinated with fiscal policy.

"Market behaviour regarding inflation has been disrupted. In order to bring it under control, we must achieve a shared consensus among all institutions and companies," he said. "The central bank has been left alone on this inflation issue."

Two weeks ago, the central bank kept its policy rate at 19% and said inflation could be volatile through the summer, giving no clear indication that an expected easing in policy was imminent.

The central bank last changed its one-week policy rate in March when former governor Naci Agbal raised it to head off inflation, which has risen since last September and has been in double digits for most of the past four years.

Food price inflation was forecast to be 10.1% in 2022, up from 9.8% in the previous report. The bank's oil price assumption was $69.6 for 2021 and $69.4 for 2022.

Turkey registered strong growth in the second quarter due to the base effect and employment levels will continue to grow from levels impacted by COVID-19 restrictions, Kavcioglu said.

He said the current account had started to improve as gold imports fell below historical levels. Loan growth showed a moderate trend and Kavcioglu predicted Turkey's banking watchdog would limit consumer loan growth. (Additing reporting by Nevzat Devranoglu; Writing by Daren Butler; Editing by Dominic Evans and Catherine Evans)