Inflation is expected to decline in the short-term owing to a partial correction in food prices, the Central Bank of the Republic of Turkey (CBRT) announced yesterday, adding that future interest rate decisions would depend on improvements in the inflation outlook. According to the bank, developments in food prices and exchange rates have led to a rise in inflation during recent months.

The country's annual inflation rose to 8.1 percent in May from 7.9 percent in April, while annual inflation on a 12-month moving average basis rose to 8.45 percent over the same period, the Turkish Statistical Institute (TÜİK) said on June 3. The CBRT forecasts year-end inflation at 6.8 percent.

"Food prices started to moderate in May, and further correction is expected in the short-term. Inflation expectations are still above the desired levels," the bank said in a presentation to bank economists published on the bank's website yesterday. "Inflation is expected to decline in the short-term owing to a partial correction in food prices. Yet, recent movements in exchange rates have delayed improvement in core indicators. This, combined with the uncertainty in global markets and volatility in energy and food prices, makes it necessary to maintain the cautious stance on monetary policy," the CBRT said.

The CBRT's Monetary Policy Committee decided to keep the policy rate unchanged at 7.50 percent on Tuesday, as widely expected. "Future monetary policy decisions will be conditional on improvements in the inflation outlook. 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," the bank said.

According to the bank, loan growth in the country continues at reasonable levels in response to the tight monetary policy stance and macro prudential measures.

The bank added: "The favorable developments in terms of trade and the moderate course of consumer loans contribute to the improvement in the current account balance. External demand remains weak, while domestic demand contributes to growth moderately. Industrial production continues to expand with contribution from domestic orders, while exports remain relatively weak."

The bank also said exports and imports continue to decline in terms of dollars, reflecting movements in the dollar-euro exchange rate, slowdown in global demand and geopolitical developments.

"The favorable impact of lower oil prices on the current account balance will be more pronounced in the forthcoming period," the bank added.