Biggest Inflation Drop in 3 Years May Speed Turkey Rate Cuts

  • Inflation slows to 7.46% in March as food price gains moderate
  • Core inflation may keep central bank from cutting aggressively

Turkey’s inflation rate recorded its biggest annual decline in more than three years, giving the central bank more room to keep cutting rates.

Price gains declined to 7.46 percent from 8.78 percent in February, beating the median estimate of 8.2 percent in a Bloomberg survey of analysts. Annual increases in the cost of food slowed to 4.58 percent in March from 8.83 percent a month earlier, Turkey’s statistics bureau said in a statement on Monday. The lira was little changed following the announcement.

After Governor Erdem Basci cut the overnight lending rate last month, the central bank told economists that annual inflation probably slowed on an annualized basis in March because it rose relatively sharply a year earlier. The rapid slowdown allows the bank to continue cutting its overnight lending rate, pared for the first time in more than a year, according to Odeabank economist Sakir Turan.

At the same time, limited improvement in core inflation, which excludes volatile prices such as food and energy, will prevent policy makers from moving aggressively, he said.

Moderate Cuts

“This reading supports a policy that might continue making moderate cuts to the overnight rate,” said Turan, who had the the most accurate forecast of 7.48 percent in the Bloomberg survey. “We might see a further drop in the inflation rate due to food prices, but such a decline may not be long-lasting.”

In a statement accompanying its rate cut decision last month, the central bank noted a limited improvement in core inflation, which slowed to 9.51 percent in March from 9.72 percent a month earlier. The gauge may not decline as fast as the headline figure because it accelerates quickly at times of lira weakness but doesn’t slow at the same pace when the currency stabilizes, Turan said.

The lira lost almost 20 percent against the dollar last year when core inflation climbed to 9.51 percent from 8.73 percent at the end of 2014, according to data compiled by Bloomberg.

The core gauge hasn’t outstripped the main index by this much since June 2004, according to official data. The divergence was due to a combination of recent lira strength and historically low oil prices, developments outside the central bank’s control, Ipek Ozkardeskaya, a London-based market analyst at London Capital Group, said by e-mail.

“The dovish speculation regarding the central bank is expected to limit the scope of gains in the lira,” she said by e-mail.

Market rally

After the inflation announcement the currency gained as much as 0.6 percent before trading 0.3 percent higher at 2.8142 per dollar as of 6:46 p.m. in Istanbul, set for the highest since Aug. 12 on a closing basis. It posted the biggest advance among 24 emerging-market currencies tracked by Bloomberg after the South Korean won and Hungarian forint.

The yield on the nation’s 10-year government bonds fell 15 basis points to 9.83 percent, the lowest since November, taking their decline this year to 91 basis points.

The Borsa Istanbul 100 Index of stocks jumped 1.8 percent, to the highest level since June. The gauge extended its advance this year to 17 percent led by banks, with Turkiye Garanti Bankasi AS and Akbank TAS, the nation’s largest listed lenders, climbing 3.8 percent and 2.5 percent respectively.

“The market sees lower than expected inflation figures and continuing lira strength as more room for further cuts in the overnight lending rates,” Cagdas Dogan, a banking analyst at Istanbul-based BGC Partners, said by e-mail. “For banks, this means relatively cheaper funding in the short term, thus wider margins, and opportunity to mark gains via bond portfolios.”

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