Turkey’s annual Inflation Rate drops to 2-year low

Turkey’s annual inflation rate edged lower to a two-year low in June but remained well above the central bank’s medium-term target, indicating the bank has little room to loosen monetary policy to boost growth.

Consumer price inflation eased to 7.2% in June-the lowest figure since May 2013–from 8.09% in May, the state statistics agency said Friday. This compares with a forecast of 7.4% in a survey by The Wall Street Journal. Turkey’s annual rise in food prices slackened to 9.3% in June from 12.8% in May, data showed.

“Although today’s figure and possible further correction in food prices might be a breather for central bank, we do not think that they suffice to allow the bank to ease monetary conditions,” said Gokce Celik an economist at Finansbank. “On the contrary, we see short term interest rates to end this year at a higher plateau than the current one as we expect central bank adjusting its policy stance, once Fed’s rate hikes begin.”

“The soft consumer price index data will likely lead to some improvement in inflation expectations and in central bank credibility. However, the effect isn’t enough to make any changes in the monetary policy,” added Yarkin Cebeci, an economist with J.P. Morgan Chase & Co.

The central bank has struggled to tame inflation to its medium-term target of 5% in the face of a depreciating currency and political pressure to cut interest rates to spur economic growth.

The World Bank on Wednesday lowered its 2016 and 2017 growth outlook for Turkey amid political uncertainty but kept it growth forecast for the country for this year at 3%. Turkey’s economy grew 2.9% last year, missing the government’s 3.3% target and slowing from a 4.2% growth rate in 2013.

Turkey’s currency has slumped 15% against the dollar since the start of this year amid a broader emerging markets selloff on expectations that U.S. Federal Reserve will raise interest rates later this year and domestic political uncertainty.

Turkey’s long-ruling Justice and Development Party, or AKP, won the most seats in parliament in the June 7 elections but lost the majority it enjoyed for 13 years. No clear scenarios have yet emerged for either a coalition or minority government.

“If the political uncertainty deepens and the lira gets under significant pressure, the central bank could react by hiking both the policy rate and the upper band of the corridor in order to restore credibility and to support the lira, ” J.P. Morgan’s Mr. Cebeci said.

The central bank last month held interest rates steady for the fourth consecutive month, keeping the benchmark one-week repo rate at 7.5%. The decision reflected a deterioration in inflation expectations among businessmen in a central bank survey last month.

Source: MarketWatch