Turkey Prices Near Record High Add to Rate Hike Expectations

(Bloomberg) -- A key measure of Turkey's consumer inflation grazed a record high, fueling expectations that the nation's central bank may raise borrowing costs further to curb prices.

Core prices rose an annual 12.2 percent in April, near the all-time peak of 12.3 percent in December 2017. Overall consumer inflation accelerated to 10.9 percent from 10.2 percent in March, exceeding the 10.5 percent median estimate in a Bloomberg survey of economists.

The disappointing inflation figures pushed the lira lower, extending this year's decline, which had been fueling inflationary pressures in the first place. The weak lira and and rising energy costs have worsened the inflation outlook for the rest of the year, according to Turkish central bank Governor Murat Cetinkaya, who tightened monetary policy with a 75-basis-point rate hike this year. According to Capital Economics economist Jason Tuvey, further interest rate increases are likely after snap elections scheduled for June 24.

“All of this strengthens the case for the Turkish monetary policy committee to take further steps to tighten monetary policy over the coming months,” Tuvey said in an emailed note. “Given the backdrop of upcoming presidential and parliamentary elections, and the possibility of political pressure for lower interest rates, the monetary policy committee may be hesitant to raise interest rates at its next meeting in June.”

The lira weakened to a record low after Turkstat published the inflation report and was trading down 0.4 percent at 4.1928 per dollar at 11:52 a.m. in Istanbul. The yield on Turkey's 10-year lira bonds rose 29 basis points to 13.22 percent, according to data compiled by Bloomberg.

Monthly inflation was 1.9 percent in April, compared with a 1.5 percent forecast in a separate Bloomberg survey. The report shows strong, broad-based gains driven by energy prices, which rose an annual 12 percent, up from 8.3 percent in March.

Despite the worse-than-expected monthly data, Turkey's central bank may sidestep a rate rise in favor of other measures at its next rate meeting, according to Aktif Yatirim Bankasi chief economist Ozlem Yetkin, whose 10.8 percent estimate for annual inflation was the most accurate in the survey.

“The monetary policy committee is aware that the weak currency and rising energy costs are behind the rise in the inflation rate,” Yetkin said. “During the next meeting, they might just simplify their monetary policy framework as promised by Cetinkaya and gauge market reaction. Today's inflation data alone doesn't mean they will necessarily raise interest rates.”

--With assistance from Constantine Courcoulas

To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net.

To contact the editors responsible for this story: Benjamin Harvey at bharvey11@bloomberg.net, Amy Teibel, Mark Williams

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