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Turkish Inflation Surges on Lira Slide, Challenging Bank

Turkish inflation accelerated in October as the weaker lira and tax increases pushed price growth further beyond the central bank’s target for the year.

The inflation rate rose to 7.7 percent from 6.2 percent in September, the statistics office in Ankara said on its website today. The median estimate of eight economists surveyed by Bloomberg was 7 percent. In the month, prices rose 3.27 percent, the biggest gain in nine years.

Central bank governor Erdem Basci forecast the gain and said on Oct. 26 he’d devised a tighter monetary strategy that will help support the lira and tame inflation without requiring an increase to the benchmark interest rate, which he’s kept at a historic low of 5.75 percent.

“The bank accepts short-term pressure on inflation but argues its efforts to stabilize the lira reflect its determination to fight inflation,” Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London, said in an e-mailed report. Keeping the benchmark rate unchanged leaves “a nagging impression that they still want to prioritize growth.”

The central bank has said inflation will probably end this year at 8.3 percent, above its goal of 5.5 percent. A target of 5 percent for 2012 remains in reach because growth is slowing and the impact of the weaker lira will fade, according to forecasts the bank issued on Oct. 26.

Yields on benchmark two-year lira debt declined 4 basis points to 9.91 percent at 5 p.m. in Istanbul. The lira rose 1 percent to 1.7620 per dollar. The main ISE National 100 index of shares climbed 1.4 percent to 56,522.77.

Variable Costs

Basci said there’s no need to raise the benchmark because the central bank has the power to vary the cost of funding to lenders between 5.75 percent and as high as 12.5 percent on a daily basis by regulating the amount it lends at each level.

The lira fell almost 20 percent against the dollar in the year to the end of October, driving up import prices. It dropped to a record low of 1.9096 on Oct. 4. The bank will fund banks at the benchmark rate as long as the lira is stable and provide more expensive lending if it falls, Basci said on Nov. 1.

Adding to the impact of the currency are household electricity prices that rose 10 percent, gas prices that jumped 14 percent and tax increases on cars, alcohol, mobile phones and cigarettes. All those increases took effect in October.

The bank cut its benchmark repo rate to 5.75 percent on Aug. 4, arguing the reduction was needed to shield the economy against a possible recession in Europe, Turkey’s main trade partner. The bank argues that its overall monetary policy is disinflationary because controls on the supply of money and curbs on bank lending outweigh the lower interest rate.

The cost of goods leaving Turkish factories and mines rose an annual 12.6 percent in October, compared with a gain of 12.2 percent the previous month, the statistics agency said today. Producer prices rose 1.6 percent on the month.

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