Turkey fails to meet year-end inflation target

AA Photo

Turkey missed its year-end inflation target, as consumer price index increased by 7.4 percent through the past year, coming in above the government’s 6.8 percent objective.

The consumer price index in the country increased 0.46 percent in December on a monthly basis, driven by the higher-than-expected rise in food prices and LPG hikes, according to data announced by the Turkish Statistical Institute (TÜİK).

With the announcement of the data, it has been revealed that the economy management in the country failed to hit their target of 6.8 percent, which was already revised upwards in November.
The weakness of the lira and higher-than-expected global oil prices have driven inflation higher in recent months, prompting the Central Bank in October to raise its inflation forecasts for the full year.
The Central Bank, as expected, had forecasted the inflation to edge up to 6.8 percent at the end of 2013, and 5.3 percent at the end of 2014, at higher levels than its previous forecasts of 6.2 and 5 percent respectively.

Anadolu Agency reported the bank will send an open letter to the government explaining the reasons of missing the inflation target and the measures taken to succeed.

Currency weakening

The Turkish inflation proceeds above expectations, particularly as of the second quarter, mainly due to the devaluation of the Turkish Lira, which was hit harshly when the United States’ central bank Federal Reserve signaled it may taper off its monetary easing.

The Turkish Central Bank was following a roadmap, which appears to be focusing on making the bank’s policies as gradually predictable as possible, with the aim of reducing global incidents’ impact on inflation.

The lira rose immediately after the release of inflation data but as analysts concluded price pressures were still not enough to persuade the Central Bank to hike rates, gains were erased.

“The mix of (a) weaker (lira), higher rates and higher political risk premium suggests there’s a significant downside risk to our 3.5 percent GDP growth forecast for 2014,” a note from Bank of America Merrill Lynch said.

“It will be very difficult for (the central bank) CBT to hike rates in a backdrop of weakening domestic demand on the fallout of the political crisis.”

Despite sharp falls in the lira, the bank has declined to increase interest rates for fear of harming growth in the run-up to elections.

The central bank has stuck instead to its unorthodox method of supporting the lira mainly through dollar sales.

It sold $1.2 billion in forex auctions on Dec. 30 and 31 but returned to its more usual $100 million sales on Jan. 2.

Probe hits hard

Having hit record lows in the previous session the lira weakened to 2.1741 from 2.1732 late on Jan. 2.
The main Istanbul stock index was down 0.39 percent at 66,726.26 points but outpaced the main emerging market index which was down 1.03 percent.

The wide-ranging graft probe began with a series of dawn raids and arrests last month and has led to the resignation of three ministers and the dismissal of around 70 police officers.

It has revealed fractures within the AK Party, which has ruled for over a decade, and unnerved investors in the run-up to local and national elections this year, prompting a sharp selloff of Turkish assets.

Deputy Prime Minister Ali Babacan, who is in charge of economy, said stock market losses alone had reached 50 billion dollars since the bribery probe hit the headlines with mass arrests in mid-December.

“Turkey has been sold off relatively much more than what the macro economy implies because of the added risk from political uncertainty - so today there is not such a hit. Given the election schedule in the next 6 months, the uncertainty will remain until the polls come in,” said Erkan Dernek, market strategist at Odeabank.