Who's to blame? At almost 10%, Turkey's inflation rate hits 2 year high
Turkey's annualized consumer prices in April hit their highest level in two years to reach 9.38 percent, signaling an even higher inflation rate for May amid rising food prices and a still-weak lira, government data revealed on Monday.
The consumer price index (CPI) in April exceeded market expectations and increased by 1.34 percent over the previous month due to rising food prices amid drought and the depreciating lira. April is also the opening of the new season in clothing, a factor that sent average prices higher.
The Turkish Statistics Institute (TurkStat) reported on Monday that annual inflation had topped market expectations and hit its highest since April of 2012. Observers argued annual inflation could exceed double digits in May with the effect of rising food prices yet to come.
Turkey's growth in the past decade has in part been based on political stability. But growth has slowed sharply, inflation is now well above target and consumer confidence is hovering around four-year lows. Monday's data also showed inflation in the first four months of the year had reached 4.96 percent, nearing the central bank's 5 percent target and the government's forecast of 5.3 percent in its medium-term economic program (OVP) for 2014. Core inflation rates in the last three months have recorded above the CPI and market observers noted inflation will be above 8 percent by year end.
“The average annual core CPI inflation increased from 9.2 percent to 9.9 percent, the highest level since the Lehman collapse. These core indicators should be well below 5 percent in Turkey in order to reach our medium-term inflation target. In addition, the 3-month rolling annualized core CPI continued to rise from around 8 percent to 12 percent in the last two months, which suggests that the central bank should do much more to contain inflationary pressures,” said Özgür Altuğ, chief economist at BGC Partners in İstanbul, on Monday stressing that they have revised their year-end CPI inflation up from 7.6 percent to 7.9 percent for the first time.
Domestic producer prices rose 0.09 percent for the month for an annual increase of 12.98 percent, TurkStat data showed.
Little room for big rate cuts
Inflation in April stood stubbornly above the central bank's forecast for the end of the year and weighing against the likelihood of significant interest rate cuts in the near term.
"The higher than expected inflation was caused by the delayed effects of lira depreciation and the secondary effects of [higher] food prices," said HSBC strategist Ali Çakıroğlu. "We expect the rise in inflation to continue in May, and inflation to gradually fall during the second half of the year."
Central Bank Governor Erdem Başçı said last week he saw room for a gradual lowering in interest rates but ruled out a deep cycle of easing, saying policy would stay tight until there was a clear improvement in the inflation outlook. "Possibly some easing might be delivered as inflation peaks in May and starts a downtrend thereafter," he said in a note.
The central bank stunned markets with a sharp rate hike at the end of January, ignoring political pressure as it battled to defend the lira after its fall to record lows. It has repeatedly said since then that monetary policy will remain tight until there is a clear improvement in the outlook for inflation.
The bank last week raised its mid-point forecast for 2014 year-end inflation to 7.6 percent from a previous forecast of 6.6 percent, well above its target rate of 5 percent, although Başçı said he expected inflation to start falling from June. It left its mid-term inflation target unchanged at 5 percent and forecast the 2015 inflation mid-point at 5 percent as well.
Prime Minister Recep Tayyip Erdoğan, a strident opponent of high borrowing costs, last month called for an emergency rate cut, saying markets had rallied after his ruling party dominated March local elections and such a move would encourage investors. Erdoğan has overseen a decade of rising living standards in Turkey and is keen to see low rates and strong growth ahead of a presidential race in August, in which he is widely expected to stand, as well as parliamentary polls next year.
"[The April data decreases the possibility of rate cuts and postpones expectations to later months as the central bank would like to ensure that its tight policy stance drives inflation down to target levels," said Erkan Dernek, a market strategist at Odeabank in İstanbul.
"Although the initial reaction on the currency and bond markets was not so significant, equity markets had sold off slightly," he said.
The main share index Borsa İstanbul (BIST) fell 0.4 percent to 74,859 points by Monday afternoon, underperforming the broader emerging markets index.
The 10-year benchmark bond yield fell to 8.98 percent from Friday's close at 9.09 percent, while the lira firmed slightly to 2.0973 against the dollar from 2.1008 before the inflation release.