By Nevzat Devranoglu
ISTANBUL, Nov 20 (Reuters) - Turkey's Central Bank sees 2010 inflation below the official 6.5 percent target, Governor Durmus Yilmaz told a conference on Friday, a day after the bank cut its benchmark interest rates by 25 basis points.
The bank's rate-setting Monetary Policy Committee said on Thursday inflation was expected to retain its low trend until mid-2010 despite seasonal hiccups due to the base effects.
Yilmaz said he saw 2009 inflation near the lower end of its target range, which is between 5.5 percent and 9.5 percent.
Consumer prices rose 5.08 percent year-on-year in October, marking a fresh 40-year low after reaching 5.24 percent in May, but still keeping inflation comfortably below the Central Bank's official year-end target of 7.5 percent.
"When we take into account the calculations, I suppose, we think ending the year at levels around 5.5-5.6 percent," Yilmaz said.
Yilmaz said inflation might spike until April 2010.
"This is completely down to base effect and it is not something that will affect monetary policy. We won't react to this and we thing inflation will come below a 6.5 percent target in 2010," Yilmaz said.
RECOVERY SIGNALS
Year-on-year economic growth was still in negative territory but the first signals of recovery have started to emerge, Yilmaz said. He said that the country had no plans to tax short-term capital flows, or "hot money".
Authorities from Brasilia to Moscow to Jakarta are moving to curb what they say are "hot money" speculative flows fuelling rapid currency appreciation and destabilising their recovering economies.
Turkey's ruling AK Party has long rejected protectionist policies and it said it would stick to free market policies including free trade and privatisation to lessen the role of the government in the economy and create more room for firms.
Turkey's economy contracted 10.5 percent in the first half and is expected to shrink 6 percent for the whole of this year.
The capacity utilisation rate may fluctuate in the last quarter of the year, Yilmaz also said.
Yilmaz said it would be good for banks to retain their 2009 profits and not pay dividends, and added that loans would be the main source of banks' revenues next year.
Turkish banks posted huge profits this year thanks to falling interest rates and the difference between their lending and borrowing rates.
The bank's rate-setting Monetary Policy Committee has become more dependent on data for its future interest rate decisions, after cutting rates by 10.25 percentage points in the last year.
A possible "technical rate cut", which would make the overnight lending rate the bank's benchmark rate rather than the borrowing rate, would ensue a serious fall in liquidity in the banking system, Yilmaz said.
(Writing by Selcuk Gokoluk; Editing by Ron Askew) Keywords: TURKEY CB/INFLATION
(selcuk.gokoluk@reuters.com; +90 312 292 7012; Reuters messaging: selcuk.gokoluk.reuters.com@reuters.net)
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