Slowing Turkey Inflation May Be Temporary as Food Set to Surge

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Turkish inflation slowed in July, driven by seasonal factors that will likely provide only temporary relief for the central bank as it seeks to lower price gains.

The annual inflation rate fell to 6.81 percent from 7.2 percent in June, in line with the median forecast of 6.83 percent in a Bloomberg survey of economists. Food price growth was little changed at 9.25 percent in July, higher than central bank Governor Erdem Basci’s forecast of 8 percent.

Textile prices fell about 5 percent, while annual gains in housing costs also slowed, the statistics institute said in a statement on Monday. Summer is usually a season for textile discounts, while the housing market also slows in the holidays.

The data is unlikely to indicate a significant shift toward the central bank’s long-term inflation target of 5 percent, said Yeliz Karabulut, vice general manager at Alan Menkul Degerler, who predicted Monday’s figure. Food price gains in the fourth quarter will boost inflation again, he said.

“Food prices show no momentum to fall further, which is why I foresee an acceleration in inflation from September,” Karabulut said. “The central bank will keep liquidity tight as a result of this.”

The lira strengthened briefly following the report before reverting to its earlier retreat. The currency traded 0.2 percent lower at 2.7759 per dollar at 12:48 p.m. in Istanbul, and is down almost 16 percent since the beginning of the year.

The currency’s weakness may push inflation above 8 percent by the end of the year, Karabulut said.

The central bank last week revised its year-end forecast to 6.9 percent from 6.8 percent, citing the lira’s depreciation in the April-to-June period. Basci said at the time volatility in food and energy prices merit “cautious” monetary policy.

The governor has kept his main interest rate of one-week repo on hold at 7.5 percent since February after making a cumulative cut of 0.75 percentage point during the first two months of the year.

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