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Turkey Inflation at 8.9 Percent Beats Estimates; Bonds Surge

Turkish inflation accelerated at a slower pace than expected last month, beating all economists’ expectations and prompting banks including Morgan Stanley to cut their forecasts. Bonds jumped.

June inflation climbed to 8.9 percent from 8.3 percent in May, the statistics agency in Ankara said on its website today. The figure was less than all estimates in a Bloomberg survey of nine economists and beat an average prediction of 9.5 percent. Prices fell 0.9 percent in the month.

“The biggest uncertainty now is whether annual consumer price inflation will rise back to double digits in the summer, but we think the central bank will maintain its tight monetary policy in order to avoid that,” Ozgur Altug, chief economist at BGC Partners in Istanbul, said in an e-mailed report to clients.

Central bank governor Erdem Basci has mixed funding to banks between rates of 5.75 percent and 11.5 percent on a daily basis since October to tame inflation and rein in the current- account deficit, while keeping economic growth intact. The policy has helped Turkish bond yields fall 268 basis points this year, making them the second best-performing bonds in emerging markets, trailing only Brazil. The central bank’s average lending rate was 8.74 percent yesterday.

Morgan Stanley

Recent data and lower oil prices prompted Morgan Stanley to cut its estimate for inflation at the year-end to 6.6 percent from 7.3 percent, economist Tevfik Aksoy said in an e-mailed report today from London.

The central bank will probably maintain “tight funding” to banks and lowering rates now “does not seem like a necessary or effective move,” he said.

Two-year benchmark bonds strengthened today, with yields sliding 13 basis points to 8.31 percent in Istanbul, the lowest level since September. The lira climbed 0.4 percent to 1.7978 per dollar at 5:00 a.m. The main ISE National 100 (XU100) share index rose 1.2 percent to 62,688.96.

Lowering Estimate

The central bank may cut its 2012 inflation forecast of 6.5 percent toward its official target of five percent should the downward trend in commodity and oil prices continue, Basci said on June 28. The price of Brent crude has dropped 10 percent this year to $97.5 per barrel.

“The likelihood of year-end inflation being closer to the central bank’s forecast of 6.5 percent is now much higher than before owing to the recent sharp declines in food prices,” Ilker Domac, economist at Citigroup Inc. in Istanbul, said by email. “Against this backdrop we expect inflation to fluctuate between 8.5 percent and below 9.5 percent until October, before declining to the 6.5 to 7 percent range in the last quarter.”

Two-year interest-rate swaps used to bet on borrowing costs dropped as much as five basis points to 9.08 percent today, heading for the lowest in eight months. The rate reached as high as 11.45 percent in January.

Producer price inflation slowed to 6.4 percent in June from 8.1 percent the previous month, the statistics agency said. The central bank’s favored measure of core inflation dropped to 7.4 percent from 7.7 percent.

Lira-Sensitive

The lira slumped 18 percent against the dollar last year, the biggest depreciation worldwide, as inflation accelerated, the current-account gap swelled to a record and oil prices rose for a third year.

“The central bank will remain sensitive to currency strength in order to prevent any deterioration in inflation expectations,” Inan Demir, chief economist at Finansbank AS, the unit of National Bank of Greece (TELL) SA in Istanbul, said in an e-mailed report to clients.

The bank’s ability to ease monetary policy will be limited unless foreign inflows pick up, Domac said.

To contact the reporters on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net; Ali Berat Meric in Ankara at americ@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net

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