Biggest Price Drop Since 2012 Paves Way for Turkey Cut Pressure

Turkish consumer prices in December recorded their biggest monthly fall in more than two years, heightening expectations of renewed government pressure on the central bank to lower borrowing costs.

Prices fell by 0.44 percent from November, led by declines in transportation and apparels, Turkey’s statistics bureau said in a statement on its website today. That’s the biggest monthly drop since June 2012, according to data compiled by Bloomberg. The annual inflation rate fell to 8.17 percent beating the median estimate of 8.78 in a Bloomberg survey of economists.

The government will likely resume calls on the bank in Ankara to cut interest rates after the December slowdown in inflation, according to Ipek Ozkardeskaya, a currency strategist at Swissquote Bank SA in Geneva. The inflation rate is forecast to fall to 6.1 percent in the second quarter of this year, according to a Bloomberg survey.

“Lower CPI rate is a suitable argument to cut rates, and could give a reason to the central bank to line up with the government’s desire for lower rates,” Ozkardeskaya said.

Transportation costs fell 1.8 percent in December from the previous month as gasoline prices continued to decline. The cost of clothing fell by 3.7 percent during the same period as retailers deepened discounts before January sales began.

Turkish central bank Governor Erdem Basci on Oct. 31 revised down an official forecast for inflation in December by half a percentage point to 8.9 percent, citing a fall in global energy prices. Price gains are still higher than the bank’s annual target due to food prices and a weakening lira, according to Basci.

Members of the government have been calling on Basci to lower borrowing costs since the governor raised them in an emergency meeting last January to bolster the lira. While Basci has lowered his main rate by 175 basis points to 8.25 percent after the emergency increase, he has vowed to maintain “tight monetary policy stance” until the inflation outlook improves significantly. Basci said Dec. 10 that policy makers expect a rapid fall in the inflation rate this year, underpinned by falling commodity prices.

The lira strengthened after the inflation data and was trading 0.3 percent higher at 2.3382 per dollar at 10:58 a.m. in Istanbul.

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