Turkish December Inflation Slowed to Year Low of 6.4%

Turkey’s inflation rate fell to a year low in December, making it more likely the central bank will reduce interest rates further.

Consumer prices rose 6.4 percent from a year ago, after advancing 7.3 percent in November, the statistics office in Ankara said on its website today. Economists expected an increase of 6.8 percent, according to the median of five estimates in a Bloomberg News survey. Prices fell 0.3 percent from a month ago.

Central bank Governor Durmus Yilmaz has been trying to balance the demands of exporters, who are calling for cuts in the key rate to help slow inflows of foreign currency that may strengthen the lira, with the need to ease surging domestic demand. The bank on Dec. 16 reduced the benchmark interest rate to a historic low of 6.5 percent and increased the amount lenders have to set aside against loans. It said the net impact was a tighter monetary policy.

“The bank is trying to make policy looser externally to discourage speculative inflows while tightening from the domestic perspective,” Inan Demir, chief economist at Finansbank AS in Istanbul, said in a telephone interview. “It would be difficult for the bank to convince markets of the need for it if inflation were increasing.”

Yields on benchmark two-year lira debt fell to a record low of 7.04 percent following the inflation data. They reversed those gains later and were trading 5 basis points, or 0.05 percentage points, higher at 7.16 percent at 10:57 a.m. in Istanbul.

Economic Growth

Gross domestic product grew 5.5 percent in the third quarter of the year from the same period a year ago, largely fueled by domestic consumption, following a 10.2 percent jump in the three months through June. The economic expansion in 2010 probably exceeded the government’s 6.8 percent forecast and was among the fastest in Europe, Deputy Prime Minister Ali Babacan said on Dec. 10. The economy contracted 4.7 percent in 2009.

Authorities want consumer lending “to expand, but by a reasonable amount,” Babacan, who heads economic policy, said in an interview today with Bloomberg HT television. He said that if consumer loan growth remained just under 30 percent, which is where it ended 2010, it would be suitable.

Imports surged 36 percent annually in November, while exports grew 6 percent. The current-account gap widened to $40.8 billion, or about 5.6 percent of GDP, in the 12 months to October.

‘Contagion Concerns’

A wider current-account deficit exposes Turkey to “market sentiment, including contagion concerns from problems in Europe,” the International Monetary Fund said in a report on Turkey on Dec. 17.

The consumer-driven boom has helped push the National 100 share index in Istanbul up 25 percent in 2010, outperforming the MSCI Emerging Markets Index’s 16.5 percent gain. It is also attracting foreign companies. In November Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, agreed to pay $5.8 billion for 24.9 percent of Turkiye Garanti Bankasi AS.

The December inflation rate compares with the bank’s goal of 6.5 percent for the year. Yilmaz is predicting that inflation will slow to 5.4 percent by the end of 2011, close to its 5.5 percent target. The bank next meets to set the benchmark rate on Jan. 20.

Food prices fell 2.7 percent in December from a month earlier. The measure of core inflation that excludes food and energy prices accelerated to 3 percent from 2.5 percent, the statistics office said.

‘Demand Pressures’

“The increase in core inflation is limited and it’s too early to talk about demand pressures,” Haluk Burumcekci, chief economist for Fortis Bank AS in Istanbul, wrote in an e-mailed comment. “The sharp decline in annual inflation strengthens the bank’s hand in moving toward a rates cut this month.”

The economy’s revival also comes as Prime Minister Recep Tayyip Erdogan prepares to seek a third term in office in elections due in June. The country survived the global crisis without bailing out any banks and last year Erdogan ended loan talks with the International Monetary Fund, saying Turkey can meet its borrowing needs without external assistance.

The cost of goods leaving Turkish factories and mines rose 8.9 percent in the 12 months through December, compared with 8.2 percent the previous month, the statistics agency said today. Producer prices rose 1.3 percent in the month.

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