Turkey hikes inflation forecast as lira falls

ANKARA: Turkey's central bank said Wednesday inflation would be in the double digits this year as the nation's currency tested new lows against the dollar and euro.

The Turkish lira has lost more than a quarter of its value against the dollar since the start of the year, which translates into higher prices for imported goods and steeper inflation.

The central bank said in a report that annual inflation will come in at 12.1 percent as opposed to the 8.9 percent it had predicted three months ago.

The lira reached record-low levels of 8.29 against the dollar and 9.73 against the euro on Wednesday before recovering slightly.

The falls follow a deterioration of Turkey's relations with its Western allies and a quick depletion of the central bank's foreign currency reserves.

The currency's problems are being compounded by Turkish President Recep Tayyip Erdogan's unfounded belief that higher interest rates cause inflation.

A low interest rate, particularly one that is near or even less than the inflation rate, makes a currency unattractive for investors to hold.

The central bank last week upset the markets by deciding to keep its key interest rate unchanged at 10.25 percent.

Most economists had expected a hike to 12.00 percent.

The bank's governor Murat Uysal on Wednesday did not rule out a rate hike down the line.

"Policy rate changes are an option that is always available to us," the official Anadolu news agency quoted Uysal as saying.

The bank raised its benchmark rate to 10.25 percent from 8.25 percent last month -- its first hike in two years.

The central bank had spent the past few months trying to stem the lira's losses by restricting and increasing costs for short-term borrowing that can fuel currency speculation.

But economists criticise this approach for its lack of transparency and unpredictability.