Turkey may start to see weak lira's impact in early 2017, but economic activity to matter: CB

The impact of a weak Turkish Lira on inflation will likely become visible by the first quarter of 2017, but the impact will mainly depend on the pace of economic activity, Central Bank Gov. Murat Çetinkaya said Dec. 6. 

At a news conference on the bank's monetary and exchange rate policy for 2017, Çetinkaya said the impact of forex volatility on inflation had so far been limited but upward risks to prices had increased.

"We think that the recent lira volatility will have an impact on inflation starting in the first quarter of 2017," he said. 

"The risk of the forex rate impact driving us away from our expected and projected path in the first quarter is high," he added. 

The lira has plunged to record lows in recent weeks, mainly after the U.S. presidential elections and has been hit by both local and global factors. 

"We can say that the impact of forex rates on prices will depend on domestic demand and the pace of economic activity in 2017. Here, the moderate outlook in both domestic demand and economic activity … we have been observing now may limit the expected upward trend in prices in the first quarter of 2017. While forex developments increase the inflation rate, a moderate improvement in economic activity, namely weaker growth, partly slashes this impact," he said. 

"For the monetary policy outlook, it will be important to see which impact dominates the other in the medium term," he said.

Çetinkaya did not give a specific inflation target for the first quarter, but the Central Bank's forecast for inflation next year is 6.5 percent. In November, annual inflation stood at 7 percent, below the bank's 7.5 percent forecast for the end of the year.

The bank hiked rates last month for the first...