Turkey's central bank revised its inflation target for 2009 to 7.5 percent from 4 percent after an increase in energy and commodity prices pushed the inflation rate into double digits. The bank said in a letter to government on Tuesday the inflation target for 2010 should be raised to 6.5 percent and 2011 target to 5.5 percent. Turkish Central Bank Governor Durmus Yilmaz told Reuters on Wednesday he expected inflation to rise in the summer months but the bank would work to bring it back to single digits by the end of the year.
Economy Minister Mehmet Simsek wrote in a public letter to Central Bank Governor Durmus Yilmaz that the government considered the proposed targets "appropriate," and vowed to support the independent institution in its fight against inflation.
The bank said in its letter it would allow inflation to come below target levels if food and energy prices and global conditions were better than expected. "Revising inflation targets by taking into account existing shocks will contribute to economic units taking the targets as reference again," the bank said.
The economic units had started to look at past inflation data rather than targets in their pricing behavior, it added. "Upward revision of inflation targets does not mean that the central bank will follow a looser policy."
Higher inflation means the bank will maintain its "tight stance'' on interest rates, Yilmaz said in the letter. The bank can't predict when inflation will slow as oil and food prices continue to climb, he added.
The central bank proposed no change to this year's 4 percent target, which economists say it will miss, as it did last year. Data showed on Tuesday that consumer inflation jumped into double digits for the first time in more than a year in May, to an annual 10.74 percent.
The bank had said previously it would not change this year's target, for reasons of accountability, but that it would look at the following targets towards the end of this year.
On Wednesday Yilmaz told Reuters the bank revised its inflation targets earlier than expected in order to avoid confusion between its official targets and its forecasts, and inflation figures were needed for the 2009-2011 period to go with the government's new medium-term economic programme.
Yilmaz said he expected inflation to rise during summer, but the central bank would work to bring inflation to single digits by year-end.
"There is a serious slippage in farm and energy prices and it became clear that this would be prolonged. The inflation target set under this framework no longer served as an anchor," he was quoted by Reuters as saying.
He said the government needed inflation targets for 2009-2011 for its medium-term economic programme and the central bank had certainly not thrown in the towel when it came to fighting inflation.
"The central bank maintains its determination in the fight against inflation and will maintain it. There is no going back. We are not in an environment with price stability achieved but in an environment of falling inflation," he added.
Yilmaz also said it was very important not to revise inflation targets again because of its "social contract" with society.