Easing inflation points to rate cuts

Bloomberg

refid:11584860 ilişkili resim dosyası

Turkey’s Central Bank said consumer price data for April confirmed that inflation will slow in the coming months and end the year below the Bank’s target of 7.5 percent.

Inflation eased to 6.1 percent in April, the lowest rate since July 1970, the Turkish Statistical Institute, or TurkStat, said in Ankara Monday. The slowdown confirmed Central Bank forecasts that the global crisis is slashing demand at home and abroad, helping to reduce the inflation rate, the Bank said yesterday.

"Inflation is expected to continue slowing in the short term and to finish below the year-end target," the Bank said yesterday in an e-mailed statement. It found signs of a "declining trend in all the basic sub-groups for inflation."

Governor Durmuş Yılmaz has reduced the benchmark lending rate by 7 percentage points to 9.75 percent in the past six months as the economy sank into recession. Yılmaz said on April 29 there is room for further reductions. The Bank next meets to decide interest rates on May 14. It will probably cut by 50 basis points at that meeting, and a further 25 points the following month, Morgan Stanley economist Tevfik Aksoy said in an e-mailed research note Monday night.

The Central Bank may lower its benchmark rate to 9 percent and "we would not rule out further easing to perhaps 8.5 percent," Aksoy said in an e-mailed research note yesterday.

Consumer price forecast
Morgan Stanley cut its forecast for Turkish consumer price inflation this year to 5.2 percent from 5.9 percent, after April inflation was slower than expected. Inflation has entered "new territory" and there’s a "high possibility that Turkey might actually witness a period of low inflation," said Aksoy. He also lowered the forecast for 2010 inflation to 6.2 percent from 7 percent.

A cut in the price of natural gas announced this month will reduce annual consumer-price inflation by 0.3 percentage points, the Bank said yesterday. Turkish price data showing inflation slowing to a 39-year low of 6.1 percent make further rate cuts by the Central Bank more likely, JPMorgan Chase & Co. said in an e-mailed report yesterday.

The Central Bank may cut the benchmark interest rate by 50 basis points to 9.25 percent at a meeting on May 14, Istanbul- based JPMorgan economist Yarkın Cebeci said. The Bank may undershoot its year-end inflation estimate of 6 percent, he said.

 Deutsche Bank also sent an e-mailed report yesterday saying Central Bank may lower the benchmark interest rate by 100 basis points, or 1 percentage point, to 8.75 percent over the next three months. The size of the reduction in the benchmark rate will depend on inflation expectations, economic data and progress on the government’s medium-term fiscal plan, Cem Akyürek, chief economist at the bank in Istanbul, said in the report.

Meanwhile, Ergun Özen, chief executive of Garanti Bank, said he expected Central Bank to cut rates below 9 percent as inflation slows below its estimate. There is a danger of increased dollarization in Turkey as Turkish bond yields fall to keep up with the rate cuts, Özen told reporters Monday, according to the Istanbul-based newspaper.

Benchmark bonds currently trade at a yield of 12.21 percent, according to an index of securities tracked by ABN Amro Holding NV.

Investors in Turkish markets are expecting an International Monetary Fund loan accord of at least $30 billion, Özen said.