Turkish inflation edges up in February, limiting Central Bank’s options

ISTANBUL-Reuters

Turkish inflation rose slightly less than expected in February but remained significantly above the Central Bank’s target, limiting its room to make the deep interest rate cuts demanded by President Recep Tayyip Erdoğan.

Seeking to boost flagging growth ahead of a June general election, Erdoğan has warned that defending high interest rates amounts to treason, ratcheting up pressure on the Central Bank and telling Governor Erdem Başçı to “shape up.”

Consumer prices rose 0.71 percent month-on-month in February, Turkish Statistics Institute (TÜİK) data showed yesterday, just below a Reuters poll forecast of 0.75 percent. On an annual basis they rose to 7.55 percent from 7.24 percent in January.

Economists said the data showed there was probably enough to allow for a small interest rate cut in March but this was unlikely to be deep enough to satisfy Erdoğan.

Concerns about Central Bank independence have unsettled investors and the lira eased slightly towards its record low after the data, which showed inflation was running sharply above the Central Bank’s 5 percent target.

The weakness of the lira, energy price rises and poor weather helped drive monthly inflation, which was led by a 2.59 percent increase for food and non-alcoholic drinks and a 1.77 percent transport price rise.

But economists pointed to a decline in annual core inflation, which excludes elements such as food and energy prices, to 7.73 percent from 8.63 percent a month earlier as a positive development.

“The Central Bank could point to the continued improvement in core indicators and go for a measured rate cut at the March MPC if global risk appetite and the dollar-lira rate allows,” said Is Invest economist Muammer Kömürcüoğlu.

Pressure on lira

The Central Bank trimmed all of its main interest rates last month as inflation fell, but drew fire from a government seeking to boost growth ahead of a parliamentary election in June for not cutting them sharply enough.

“We continue to expect the Turkish Central Bank to cut by 25 basis points in March,” said BGC Partners chief economist Özgür Altuğ.

“The question is whether politicians will be happy with this... We do not think so. So in any case, we believe that just ahead of and after the MPC meeting the lira might be under pressure,” he said, forecasting 2015 inflation of 6.9 percent.

The Central Bank holds its next policy-setting meeting on March 17.

Speaking on his plane travelling to Saudi Arabia at the weekend, Erdoğan told reporters he would hold talks with Başçı but did not say when.

Başçı had on Feb. 28 dismissed rumors he would quit. Prime Minister Ahmet Davutoğlu said late on March 2 that the resignations of either Başçı or Ali Babacan, deputy prime minister in charge of the economy, were “out of the question.”

Yesterday’s data also showed domestic producer prices rose 1.2 percent on the month for an annual rise of 3.1 percent.