Turkey’s Improving Core Inflation Makes Room for More Rate Cuts

  • Headline inflation remains near three-year low seen in April
  • Core rate slows to 8.77 percent, beating median estimate

Turkey’s annual core inflation registered the biggest fall in over a year, giving more encouragement to monetary policy makers who began cutting borrowing costs in March.

The core rate, which excludes volatile items such as food, gold and energy, fell to 8.77 percent in May from 9.41 percent the previous month, beating the median estimate of 9.1 percent in a Bloomberg survey. The headline inflation rate rose a basis point to 6.58 percent as gains in food prices rebounded from the slowest pace on record.

The drop in the core figure comes as a boon to the central bank, whose monetary policy committee last month cited a limited decline in the gauge as a reason to maintain “tight liquidity.” The annual decline was the biggest since February 2015, when it fell 90 basis points from the previous month. It will also please President Recep Tayyip Erdogan, who has repeatedly argued for lower borrowing costs to stimulate the economy.

Now that the “stickiness” of earlier this year appears to have abated, Governor Murat Cetinkaya may find it easier to keep lowering interest rates, according to Bora Tamer Yilmaz, an economist at Ziraat Invest in Istanbul. “The pace of cuts will depend on how fast the core rate declines,” he said by phone.

Cautious Governor

Last month’s slowdown in core inflation was led by textiles and transportation, data from Turkey’s state statistics institute showed on Friday. The slight rise in headline inflation was due to gains in food prices, which accelerated to 2.47 percent last month from 1.38 percent in April.

Cetinkaya has remained cautious over future cuts to rates, saying in April they were only intended to “simplify” the bank’s three-tier rate corridor and that policy remained tight despite recent reductions. Policy makers lowered the bank’s overnight lending rate by a total of 125 basis points since March to 9.5 percent last month.

The lira was little changed after the inflation report, trading less than 0.1 percent lower at 2.9513 per dollar at 11:11 a.m. in Istanbul. The currency lost nearly 3.5 percent against the dollar over the past month amid a political showdown between Erdogan and former Prime Minister Ahmet Davutoglu, who decided to step down after failing to assert his authority against the head of the state.

Some economists said the currency’s recent volatility will concern the central bank. Yeliz Karabulut, a vice general manager at Alan Menkul Degerler AS in Istanbul, said Cetinkaya’s committee could “pause its rate cuts this month” amid expectations for a rate increase in the U.S. and global financial swings.

Although core inflation seems to be strengthening the bank’s hand, “I don’t see it has much room left for cuts to the overnight rate,” Karabulut said by phone. “Policy makers will opt for a wait and see attitude in this month’s rates meeting. Overnight rate lower than the current 9.5 percent might prove to be risky.”

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