"exchange Rate Developments May Restrict The Fall In Inflation"

- Recent exchange rate developments might restrict the fall in core goods inflation, Central Bank of Turkey warned on Tuesday, in its summary of the Monetary Policy Committee meeting held on February 24, when it lowered the policy rate by 0.25 points in line with expectations.

"Meanwhile, the increase in fuel prices after six months in February due to the depreciation in the Turkish lira and the rise in oil prices indicates that the contribution of energy group to the decline in annual consumer inflation will be restricted to some extent" the Committee said in the summary.

The dampening effects of the weak external demand had become more evident, while domestic demand had yet to accelerate adequately, which kept economic activity from a robust recovery, the Committee said. "The weak consumer confidence was a limiting factor on consumer spending in this quarter."

The Committee reminded that, external demand indicators suggested that net exports had not contributed to growth in the fourth quarter of 2014 due to the slowing growth rates across Turkey’s major trading partners and geopolitical tensions had dampened export growth, while the modest recovery in domestic demand had led to an increase in import demand.

"Downside risks regarding economic activity continue to be important for the upcoming period" while the lingering volatility across global financial markets and the sluggish course of confidence indices might cause private final demand to provide limited support to growth, the Committee said.

"In the case of an additional slowdown in external demand and a sizeable decline in global growth rates, the decrease in commodity prices will pull inflation down but at the same time lead to notable adverse effects on domestic economic activity. Under such circumstances, the Committee will employ the policy tools to support the economy."

Taking into account the heightened volatility in food and energy prices, the Committee had cut the interest rates "with a cautious approach and kept the rate cuts at a measured scale" the Committee said and future monetary policy decisions would be conditional on the improvements in the inflation outlook, it added.

"Inflation expectations, pricing behavior and other factors that affect inflation will be monitored closely and the cautious monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook."

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