Turkish Inflation Slows Most Since 2003; Bond Yields Slide

Turkish inflation slowed the most since January 2003 after the crisis in Europe forced the central bank to tighten monetary policy and food prices slumped. Yields fell the most in two months.

The inflation rate fell to 8.3 percent in May from 11.1 percent the previous month, the statistics office in Ankara said today. The median estimate in a Bloomberg survey of 11 economists was 9 percent. Core inflation, excluding items such as food and energy, slowed to 7.7 percent from 8.2 percent. Consumer prices fell 0.2 percent month-on-month.

Central bank Governor Erdem Basci increased the cost of funding for banks to as high as 10.8 percent in May, the most since mid-January, to support the lira. The currency fell 18 percent in 2011, fueling inflation, including a 2.9 percent annual spike in May last year. The lira has slid more than 5 percent in the past month as the euro-zone crisis worsened, forcing the central bank to tighten policy as it pursues a 6.5 percent year-end inflation forecast.

“It seems clear that the euro-area jitters will reside with us for some time,” Tevfik Aksoy, chief economist for Central and Eastern Europe, the Middle East and Africa at Morgan Stanley in London, said in e-mailed comments on June 1. “The decline in headline inflation will be temporary.”

Yields on benchmark two-year bonds fell as much as 15 basis points, or 0.15 percentage point, to 9.20 percent, the lowest level since March 12. Yields dropped 8 basis points to 9.27 percent at 10:28 a.m. The lira strengthened 0.3 percent to 1.8523 per dollar, gaining for the second day.

Containing Risks

Inflation will be “volatile” and “stay significantly above target” until the last three months of the year, the central bank said on June 1. Basci will continue his tight monetary stance to “contain risks,” according to the summary of the bank’s May 29 Monetary Policy Committee meeting.

“May inflation is positive for bonds in decreasing the need for extra tightening, even though the central bank will likely continue its flexible monetary policy,” Ibrahim Aksoy, economist at broker Seker Securities in Istanbul, said in an e-mailed report to clients.

Year-end inflation will be 7.7 percent, according to the central bank’s latest fortnightly survey published on May 22. That’s the highest this year and up from a 7.2 percent forecast in the first half of February.

Food prices slumped 2.2 percent in May from the previous month, the statistics office said. Producer prices rose 0.5 percent month-on-month and accelerated to 8.1 percent annually in May from 7.7 percent in April.

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