Rate cut for Turkey in balance as inflation stays high

William Sellars

• Yearly increase slows to 47.1%
• Higher than forecast by analysts
• Central bank could yet cut rate

Despite higher than expected inflation in Turkey in November, the window may remain open for the central bank to cut its key lending rate before the end of this year. 

Turkey’s annualised inflation rate fell back to 47.1 percent in November, data issued by the statistics agency Turkstat on December 3 showed, down from October’s 48.6 percent, with monthly price rises coming in at 2.2 percent.

One of the main contributors to the monthly inflation rise was food, with the cost of food and non-alcoholic drinks up 5.1 percent in November compared to October. 

With the onset of winter, prices for fresh produce traditionally rise because of shortages, meaning inflation in the sector is likely to remain above average well into the new year. 

• Turkish growth slows as anti-inflation measures bite

• Turkish consumer confidence slides as inflation persists

• Hard-pressed Turks must wait longer for inflation to drop

Housing costs also suffered high inflation, with a year-on-year increase of 74.5 percent, the steep rise in part a result of the government in July lifting the 25 percent cap on rent increases. 

While November’s increase was lower than October’s, it was still higher than forecast. A  survey of market analysts conducted by the news service Bloomberg found them predicting that the year-on-year rise in the consumer price index would ease to 46.6 percent.

However, Burak Arzova, a professor of economics at Istanbul’s Marmara University, said that though November’s inflation figure was above expectations, he still thought there was room for Turkey’s central bank to cut its key lending rate, which has stood at 50 percent since March. 

“Inflation came in higher, but when we look at sub-items I actually find them positive,” he told AGBI.

“Food inflation is high but this is not only today’s problem, it is due to structural issues that the central bank does not have the means to deal with. 

“Once again, the increases in rents continue, with the impact likely to carry over till July, but this is yet again an area the central bank can’t do much about.”

Inflation is slowing

Stripping these factors out of the equation, Arzova said, overall inflation was slowing, which he believed could open a window of opportunity for the central bank to cut rates at its monetary policy meeting in late December. 

The November consumer price index result, however, makes it unlikely that year-end inflation will fall to the 44 percent predicted by the central bank in its last economic forecast, issued early last month 

Inflation for the first 11 months of the year came in at 42.9 percent, leaving little chance for the upgraded target to be hit. 

There was some good news for the government, with production inflation dropping to 29.5 percent, down from 32.2 percent in October, pointing to a potential follow-on effect on the consumer price index in the new year as wholesale costs continue to fall.