Turkish Inflation Rate Declines to Lowest Level in 15 Months

Turkey’s inflation rate fell to the lowest level in 15 months in December as weak domestic demand countered the effect of record-low interest rates.

Inflation dropped to 6.2 percent, the statistics office in Ankara said on its website today. The median estimate of six economists in a Bloomberg survey was 6 percent. Prices rose 0.4 percent in the month.

The central bank in Ankara cut its benchmark interest rate to a record-low 5.5 percent on Dec. 18 after economic growth slowed to 1.6 percent in the third quarter, the slowest pace since a 2009 recession. Governor Erdem Basci said Dec. 25 that Turkey would be “very close” to its inflation target of 5 percent in 2012 after ending 2011 with 10.5 percent inflation.

“Domestic demand weakened and this allowed the consumer price index to end this year lower,” Piotr Matys, an economist at 4Cast Ltd. in London, said in response to e-mailed questions yesterday before the figures were released. “Further deceleration in the consumer price index will support the easing bias to stimulate domestic demand.”

Bond yields rose 7 basis points to 6.23 percent, the highest since Nov 21, at 10:41 a.m. in Istanbul. The lira weakened 0.1 percent to 1.7806 per dollar.

Inflation will probably end this year at 6.3 percent, according to Tevfik Aksoy, a London-based economist for Morgan Stanley.

Core Inflation

“In December the headline inflation deviated from expectations mostly because of food, but core inflation remained tame which was encouraging,” Aksoy said by e-mail today. Other prices showed that “demand-pull inflation was absent,” he said.

The core inflation rate excluding volatile items including food, drinks, tobacco, energy and gold rose to 5.8 percent from 5.7 percent.

Food prices rose 1.6 percent in December, the biggest monthly increase among any category measured by the statistics agency. Prices excluding energy and food rose 0.2 percent in the month, it said.

“Inflation has been much lower than expected for the last couple of months but that’s largely due to food, which we should take with a pinch of salt,” Turker Hamzaoglu, an economist with Bank of America Merrill Lynch in London, said by e-mail yesterday. “With tobacco prices adding some one percentage point in 2013 and food prices reverting back to their historical averages in 2013 while domestic demand recovers, we should not feel complacent.”

New taxes on cigarettes may add 80 basis points to annual inflation this year, Garanti Yatirim economist Gizem Oztok Altinsac said in an e-mailed report from Istanbul today. Cigarettes make up about 5 percent of the consumer-price index basket.

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