A surprise slowdown in Turkey’s consumer prices in November is unlikely to ease investor pressure on the central bank to raise interest rates after the lira plunged to a record.
The annual inflation rate dropped to 7%, mainly due to low food prices, according to official data released yesterday. The median estimate in a Bloomberg survey of economists was an acceleration to 7.4%.
The central bank unexpectedly raised borrowing costs last month, a decision that failed to stem a rapid depreciation of the lira, amid investor concern that policy makers will hesitate to deliver more increases to counter the impact of higher US interest rates. At the same time, the central bank is also under pressure from President Recep Tayyip Erdogan to cut borrowing costs.
“The weaker lira will take its toll on prices from December, when consumer inflation will likely start accelerating again,” according to Kapital FX economist Enver Erkan, whose forecast of 7.1% was the closest among analysts surveyed by Bloomberg. “If inflation is an indicator, Turkey needs to increase interest rates, but it will prove to be difficult because of concerns over growth.”
The lira has depreciated about 11% over the past month, the most among emerging markets.
Erdogan said on Saturday that his political enemies are trying to sabotage the economy by speculating on the stock market, foreign exchange rate and interest rates after failing to overthrow his administration in a July coup. He advocated converting dollar savings into liras and gold, together with lower lending costs, to support the economy.
After last month’s rate increase, the central bank said it expected food prices and lacklustre consumer demand may mitigate the inflation risk. The bank’s full-year inflation forecast is 7.5% in 2016, dropping to 6.5% next year. It has missed its 5% target for five years in a row.
Food prices rose an annual 3.6% through November, compared with 5.2% in the previous month. Clothing prices rose at an annual rate of 4.6% from 6.1%.
A gauge of core inflation, which excludes volatile items including food and gold, was little changed at 6.99%.
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