Turkey Inflation Spurt Challenges Government Rate Cut Ambitions

A surprise acceleration in Turkish consumer price inflation in October means the central bank may keep resisting government pressure to lower borrowing costs.

The annual inflation rate rose to 9 percent from 8.9 percent last month, Turkey’s statistics bureau said in a statement on its website today. Economists were expecting a smaller increase, according to a Bloomberg survey. Prices rose 1.9 percent on the month, led by food and textiles, matching the median estimate in a separate survey.

“A drop in the inflation rate could cause long-term debt yields to fall and trigger a swift rate cut,” Bora Tamer Yilmaz, an Istanbul-based economist at Ziraat Investment, said by phone. “The inflation rate is not in line with the bank’s forecasts. This means it will continue to stay put,” he said of the benchmark rate.

Central bank Governor Erdem Basci said last week that price gains will steadily decelerate in 2015 after exceeding the bank’s 5 percent target this year. An interest rate cut might only be necessary should the yield on long-term government bonds fall, Basci said. A day after his speech, Prime Minister Ahmet Davutoglu called on the bank to “review” its rates, adding to government pressure on Basci to spur the economy with lower borrowing costs.

Basci has already cut his main interest rate of one-week repo by 175 basis points from 10 percent during a three-month easing cycle he started in May. Even as he was lowering his rates, Basci said the monetary policy stance remained “tight.”

The bank uses the difference between yields on short- and long-term government debt to decide whether its policy is tight enough, Basci said last week. The current yield difference lies below its historical average, which Basci said was a sign of tight policy.

The lira fell 0.2 percent to 2.2264 per dollar at 11:38 a.m. in Istanbul. The yield on Turkey’s two-year lira notes rose five basis points to 8.61 percent after the inflation report. The yield on 10-year bonds jumped eight basis points to 8.72 percent.

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