Declining Turkish Food Prices Give Central Bank Room to Ease

EghtesadOnline: Turkish food prices showed the biggest monthly drop seen in September, bringing annual consumer inflation to the lowest level in over a year and giving more leeway to monetary policy makers to cut borrowing costs this month.

News ID: ۷۷۰۰۵۲

05 October 2016

The annual inflation rate dropped from 8.05 percent in August to 7.28 percent last month, lower than the lowest forecast in a Bloomberg survey, where the median estimate was 7.87 percent. Food prices fell 0.7 percent from the previous month, the first time a monthly negative reading was recorded for September since Turkey began using the current inflation index in 2003, according to Bloomberg.

While the drop in food price gains was in line with central bank expectations and was the main force behind the drop in the headline figure, Monday’s inflation report by the statistics office showed a slowdown in price gains in everything from entertainment to dining and textiles. That’s underpinned by weak domestic demand and a falling number of tourists, both of which keep demand for goods and services depressed, according to Oyak Menkul Degerler chief economist Mehmet Besimoglu in Istanbul.

“The central bank is probably more relaxed after this inflation report and could reiterate its year-end forecast of 7.5 percent,” Besimoglu said by phone. “It should also allow the bank to deliver this month another measured and cautious cut to its overnight lending rate, which means a 25-basis-point reduction.”

The lira trimmed immediate losses seen after the report and was trading unchanged at 2.999 per dollar at 11:06 a.m. in Istanbul.

An index of core inflation that excludes volatile items such as food and tobacco prices slowed to 7.69 percent from 8.41 percent the previous month. The drop also supports central bank rate cuts, which will “hopefully” continue, Finance Minister Naci Agbal said in Ankara.

The central bank said in a summary of its last rates decision that it expected a gradual improvement in core prices to continue. Policy makers convene Oct. 20 for their monthly rates meeting after having cut the overnight lending rate by 250 basis points since March. Governor Murat Cetinkaya says reductions do not constitute an easing but serve his purpose of simplifying the bank’s three-rate policy framework.