Turkish Inflation Rate Rises to 19-Month High as Lira Slumps

Turkish inflation accelerated to the highest in 19 months in November and core inflation surged to a four-year high after steps to weaken the lira pushed up import costs and the government increased sales taxes on some goods.

The inflation rate rose to 9.5 percent from 7.7 percent a month earlier, the statistics office in Ankara said on its website today. The median estimate of eight economists surveyed by Bloomberg was 9 percent. In the month, prices rose 1.7 percent. The central bank’s preferred measure of core inflation jumped to 8.2 percent, the highest since June 2007.

“The central bank will argue that this is ‘just’ the result of exchange rate pass-through,” Tim Ash, head of emerging-market research for Royal Bank of Scotland Plc in London, said in e-mailed comments. “Well yes, but that’s the result of the fact that the current account deficit had been left to get too large for too long. The central bank is finally on the case, but some would argue too little, too late.”

The central bank cut interest rates in August as part of a plan to narrow Turkey’s record current account deficit without attracting excessive inflows of short-term capital. The lira has fallen 15 percent against the dollar this year, the worst performer among major emerging market currencies after the South African rand. The plunge forced the bank to reverse course and intervene in currency markets to support the lira, as well as lending to banks at higher rates to stem consumer demand.

‘Tightening Bias’

Consumer price inflation is now more than double the four- decade low of 4 percent reached in March.

Yields on two-year bonds fell 13 basis points to 10.15 percent at 5:30 p.m. in Istanbul, sliding for the sixth day, the longest streak of declines this year. Yields have risen 304 basis points in 2011. The lira advanced 0.3 percent to 1.8256 per dollar. The main ISE National 100 index rose 0.8 percent to 55,195.81.

“The fact that the core numbers keep on ticking higher while the economy slows is a worrisome issue and will force the central bank to keep even closer to their tightening bias,” Ozhan Antero Atilla, an emerging-market analyst at Danske Bank A/S in Copenhagen, said in e-mailed comments.

Turkey’s economy is slowing from an 11 percent annual growth rate in the first quarter. The bank introduced a two-tier monetary policy on Oct. 26 in an effort to slow consumer demand, varying borrowing costs for banks between the benchmark one-week repo rate of 5.75 percent and an overnight rate of as much as 12.5 percent. The government also increased taxes on tobacco, cars above 1600cc and mobile phones to help pare the current account deficit, which reached a record 10 percent of economic output in September.

‘More Extreme Correction’

The bank sees no need to adjust its so-called interest-rate corridor, central bank governor Erdem Basci said last month. The impact on import prices from the lira’s decline is likely to be temporary as monetary and fiscal policy is disinflationary, Basci said on Nov. 30.

“I’m not quite sure what signal it sends to the market when inflation is close to 9.5 percent and the benchmark rate is at 5.75 percent,” Ash said. “The lira needs to adjust weaker to counter the wide current account deficit, but given inflation risks the central bank is loathe to do this. The only solution is for the bank to engineer a more extreme correction in domestic demand.”

Expectations for inflation in 12 months rose to 6.99 percent from 6.93 percent in the central bank’s latest survey of economists and executives, released on Nov. 22.

Inflation Goal

The central bank’s policy of dual lending rates is “unsustainable” due to the adverse effects on the bond market, Citigroup Inc. economists Ilker Domac and Gultekin Isiklar said in a report on Dec. 2 from London. It may take six years for the central bank to reach its medium-term inflation goal of 5 percent, they said.

Goldman Sachs Group Inc. started publishing forecasts for Turkey’s overnight money market rate instead of the benchmark rate, and by that measure Turkish rates are the highest in the region, according to an e-mailed report on Dec. 1.

Turkey is revising its estimate for inflation this year to nearly 10 percent, in an economic program that it will present to the European Union on Dec. 15, government officials who declined to be unidentified said by telephone today. The draft document may be changed and is subject to cabinet approval, they said.

To contact the reporter on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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