Turkey’s Inflation Dip Gives Little Solace to Central Bank

(Bloomberg) -- A surprise slowdown in Turkey’s consumer prices in November is unlikely to ease investor pressure on the central bank to maintain tight monetary policy after the lira plunged to a record.

The annual inflation rate dropped to 7 percent, mainly due to low food prices, according to official data released on Monday. The median estimate in a Bloomberg survey of economists was an acceleration to 7.4 percent.

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 U.S. 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 percent 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 trimmed losses after the inflation data and was trading 0.4 percent lower at 3.5354 per dollar at 11:50 a.m. in Istanbul. The currency has depreciated about 11 percent over the past month, the most among emerging markets.

“For now, the lira is likely to remain the key driver of interest rate decisions in Turkey,” William Jackson, senior emerging markets economist at Capital Economics, wrote in a note on Monday.

“But at the margin, today’s data, which are likely to be followed by the release of extremely weak third-quarter gross domestic product figures next Monday, may prompt the central bank to leave interest rates on hold” this month, he wrote.

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.

For more on the president’s remarks, read: Erdogan Says Turkey Faces ‘Economic Sabotage’ as Lira Plunges

After last month’s rate increase, the central bank said it expected food prices and lackluster consumer demand may mitigate the inflation risk. The bank’s full-year inflation forecast is 7.5 percent in 2016, dropping to 6.5 percent next year. It has missed its 5 percent target five years in a row.

Food prices rose an annual 3.6 percent through November, compared with 5.2 percent in the previous month. Clothing prices rose at an annual rate of 4.6 percent from 6.1 percent.

A gauge of core inflation, which excludes volatile items including food and gold, was little changed at 6.99 percent.

--With assistance from Selcan Hacaoglu

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

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Mark Williams