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Turkish Inflation May Accelerate Even Before Gas Price Increase

Turkish inflation probably accelerated in September even before yesterday’s increase in gas and electricity prices, supporting arguments against further interest rate cuts.

The rate of inflation rose to 9.2 percent in September from 8.9 percent the month before, according to the median estimate of nine economists in a Bloomberg survey. The statistics agency will release the data at 10 a.m. local time tomorrow. The government targets a rate of 5 percent for the year.

The government increased taxes on cars, gasoline and alcohol on Sept. 22, and yesterday announced price increases of 9.8 percent for natural gas and electricity. The measures, aimed at plugging a widening budget deficit, add to a pickup in inflation that supports Turkish policy makers arguing for price stability to be prioritized over growth.

“We’ve been warning for long time that inflation expectations were too low and mispriced,” and investors are now adjusting their forecasts, Turker Hamzaoglu, an economist at Bank of America Corp. in London, said in an e-mailed statement. “The Turkish central bank’s 2012 forecast of 6.2 percent is likely to have moved closer to 7 percent.”

Central bank Governor Erdem Basci lowered the top end of the so-called rate corridor last month by 150 basis points, in an attempt to spur growth which will slow to less than 3 percent this year according to the median estimate of five economists surveyed by Bloomberg. That’s down from 8.5 percent in 2011.

Aggressive Easing

The central bank “has already eased monetary policy fairly aggressively” said Ahmet Akarli, an economist at Goldman Sachs Group Inc. in London. “We will see the growth impacts of this easing, probably sometime in the first quarter of 2013.”

Turkish policy makers have showed signs of division over whether to prioritize growth or inflation. Prime Minister Recep Tayyip Erdogan and Economy Minister Zafer Caglayan have said interest rates should be lower, while Deputy Prime Minister Ali Babacan and Basci have signaled the priority is fiscal discipline.

This year’s slower growth has depressed tax income, leading Babacan to forecast a budget deficit of 2.5 percent, compared with a target of 1.5 percent.

The tax and price increases have helped push yields on benchmark two-year lira bonds up 31 basis points from a year-low on Sept. 14, to 7.54 percent.

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