Turkey Inflation Decline Boosts Rate Cut Expectations

Turkish inflation slowed more than expected in April to the lowest level in two years, boosting expectations of looser monetary policy and sending bond yields to new record lows.

The inflation rate fell to 6.13 percent, lower than estimates of a 6.5 percent increase in a Bloomberg survey of 10 economists. Month-on-month inflation was 0.4 percent, compared with a 0.7 percent estimate in the survey, according to data released today in Ankara. The yearly increase was the lowest since April 2011.

Yields on Turkey’s two-year debt fell to as low as 4.96 percent after the data release, as expectations of further central bank rate cuts strengthened. The central bank cut each of its three main rates, the benchmark overnight repo rate and the two overnight rates that make up its so-called “corridor,” by 50 basis points in its last meeting on April 16.

“We think this supports central bank loosening,” Haluk Burumcekci, an economist at Burgan Yatirim in Istanbul, said in an e-mailed report today. “We see a strong possibility of a 50 basis-point cut to the corridor and a 25-50 basis-point cut to the benchmark rate.”

The surprise was mainly due to lower-than-expected food prices, which were “not expected,” Tevfik Aksoy, an economist at Morgan Stanley in London, said by e-mail. A drop in gold prices may have also contributed, he said. “The central bank will be quite happy and confident,” he said.

That mood may be short-lived, according to Ibrahim Aksoy, an economist at Seker Securities in Istanbul.

Base Effects

“One should keep in mind that the decline came partially on the back of base effects stemming from electricity and gas hikes in April 2012,” Aksoy said in an e-mail to clients today. “In other words, we may see annual inflation rising to 7 percent again in May.”

The central bank’s year-end inflation target is 5 percent this year. The bank has missed its targets in the past two years, with year-end inflation at 6.2 percent in 2012 and 10.5 percent in 2011.

The yield on two-year Turkish bonds was 4.99 percent at 10:35 a.m. in Istanbul, extending the biggest fall among major emerging markets over the past 12 months to 434 basis points, according to data compiled by Bloomberg. The lira declined 0.1 percent against the dollar to 1.7947.

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