Turkey Inflation Edging Toward Level Basci Wants to Avoid

  • Annual inflation rate increases to 9.58%, most since May 2014
  • Government has put higher taxes on both alcohol and tobacco

Turkey’s consumer price inflation climbed more than estimated in January, edging toward the 10 percent level central bank Governor Erdem Basci doesn’t want to exceed.

Consumer prices roses an annual 9.58 percent through January, up from 8.81 percent the previous month and almost double the bank’s official target, according to figures released on Wednesday by Turkey’s statistics bureau. The median prediction of economists in a Bloomberg survey was 9.5 percent.

Basci said on Jan. 26 that inflation won’t slow to the bank’s 5 percent target until 2018, and that policy makers were focused on trying to keep the rate under 10 percent in the first quarter. Curbing rising prices is a critical issue for Turkey, which relies on foreign capital inflows to finance its current-account deficit.

The central bank is under conflicting pressures, with the government urging lower rates to revive economic growth, and investors and the International Monetary Fund calling for tighter policy to stem inflation. Basci, citing global financial volatility, backtracked last month on his pledge to abandon his current multiple-rate corridor for a single rate after the U.S. Federal Reserve raised borrowing costs for the first time in a decade.

“Ultimately the lira will bear the brunt of the consequence of high inflation,” said RBS economist Gabor Ambrus, who sees the currency weakening to 3.25 per dollar over the next 12 months.

Bar Raised

The lira reversed from losses to gains after the inflation data and was trading 0.5 percent higher at 2.9373 per dollar at 1:41 p.m. in Istanbul. The currency weakened by 20 percent last year, and Ambrus said the central bank’s current monetary policy stance isn’t tight enough to protect it from further depreciation.

Given that Basci has raised the bar for action above 10 percent, the report “is something that the central bank can acknowledge without a policy reaction,” said Finansbank AS chief economist Inan Demir.

Price gains were driven by higher-than-expected food costs and tax raises announced last month. Food prices, which account for almost a quarter of the consumer-inflation index, rose an annual 11.69 percent through January, according to the Turkstat statement. Alcohol and tobacco prices, both subjected to tax increases last month, went up 11.17 percent.

Policy makers are reluctant to tighten policy to counter the impact of weakening currency on inflation, Global Securities chief economist Sertan Kargin said in an e-mailed report.

“The bar remains quite high for the central bank to deviate from its course of trying to balance between supporting economic activity on the one hand, and containing inflation and currency risks on the other,” Kargin said.

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