Turkish inflation cools to 7-mth low in March

Food prices slow down

Turkish inflation cooled to a seven-month low in March, helped by a slowdown in volatile food prices, raising the likelihood the central bank will cut rates again even though core inflation remains high.

Inflation, which topped 9.5 percent earlier this year, is seen as one of Turkey’s most pressing economic problems and cited by economists as evidence that a tightening of monetary policy is long overdue.

“The sharp decline in Turkish inflation in March ... was driven by a drop in food inflation and masked the fact that core inflation remains extremely strong,” said William Jackson of Capital Economics in a note.

“Today’s data make it more likely that the central bank will follow up its recent interest rate cut with another one this month.”

The bank cut the upper band of its interest rate “corridor” last month, prompting concern it was yielding to political pressure. President Tayyip Erdogan has repeatedly railed against the high domestic cost of borrowing, equating high interest rates with “treason”.

Consumer prices rose 7.46 percent year-on-year in March, the the Turkish Statistics Institute said on Monday, the lowest since August. Core inflation, which excludes food prices, declined slightly but remained at more than 9.5 percent year-on-year.

Food prices were the biggest contributor to the slowdown in inflation, falling 1.53 percent in March compared with a month before. On a yearly basis, they rose 4.58 percent.

“The food segment was better than expected and surprised everyone. Its contribution to the monthly drop in inflation is relatively large,” said Pinar Uslu, a strategist at ING Bank.

“Food remains a risk factor as it’s difficult to predict food inflation. It is very volatile.”

On a monthly basis, prices fell 0.04 percent, contrasting with a Reuters poll prediction of a 0.5 percent rise.

Turkey, which imports almost all of its energy needs, has benefited from lower global oil prices, unlike some of its crude-exporting neighbours.

“Turkey’s central bank is renowned for putting off the day of reckoning and the oil price-driven fall in headline inflation increases the scope for further easing,” said Nicholas Spiro of Lauressa Advisory in London.

While the bank kept its benchmark rate steady for the 13th straight month in March, it cut the upper end of its rate corridor for the first time since early 2015. The central bank controls the corridor between its lending and borrowing rates by adjusting the volumes of money available at each rate. As a result, a reduction in the upper band does not necessarily mean a change in borrowing costs.

Some analysts saw the move as a sop to Erdogan at Governor Erdem Basci’s last meeting before his term ends next month. Basci’s future is uncertain, with markets waiting to see whether he is reappointed for another five-year term after April 19.

The terms of four other members of the central bank’s seven-person monetary policy committee (MPC) also end by November.

“The big concern is the changing of the guard at the central bank later this month -- particularly since the appointment of a highly credible inflation-fighting governor is out of the question,” said Lauressa’s Spiro.