Jul 03 2019

Turkey inflation slows to 12-month low, paving way for rate cut

Turkey’s inflation rate fell to 15.7 percent in June, slowing at the fastest pace since October, when the economy was reeling from a currency shock.

Consumer price inflation eased from an annual 18.7 percent in May, the Turkish Statistical Institute said on its website on Wednesday. It was the lowest reading since June last year and below the government’s year end-goal of 15.9 percent.

The sharp fall in Turkey's inflation rate may now prompt the central bank to cut interest rates. Economic growth has slumped in the country after a currency crisis erupted last summer. The central bank responded to lira weakness by hiking interest rates 625 basis points to 24 percent in mid-September and has kept them steady since despite a consequent recession.

Inan Demir, an economist at Nomura in London, said a rate reduction by the central bank is likely at a meeting of policymakers on July 25. The bank shouldn't lower rates by more than 100 basis points because inflationary pressures are set to re-emerge from November, he said.

"This period coincides with a dovish turn in the monetary policy outlook for the advanced economies and improved market perceptions about Turkey’s geopolitical problems," Demir said in an e-mailed report on Wednesday. "We have our doubts about the latter, but the base effect-driven disinflation and easier global monetary conditions will likely pave the way for a rate cut."

Consumer prices in Turkey increased just 0.03 percent month-on-month, the institute said. The price of food and non-alcoholic beverages declined 1.65 percent and dropped 1.57 percent for clothing and footwear.

Turkish Treasury and Finance Minister Berat Albayrak said last month that inflation may slow to single digits by the Autumn. But market volatility caused by a political crisis with the United States over Turkey’s purchase of Russian S-400 missiles could cause more lira weakness and impact prices, economists say.

Producer price inflation slowed to 25 percent in June from 28.7 percent in May, the institute said, The monthly increase in prices was 0.09 percent as the price of manufacturing goods dropped 0.45 percent, it said.

The central bank is currently being helped by an alleged lull in political tensions with the United States over Turkey's acquisition of the Russian weapons, which has helped the lira partially reverse recent losses.

The lira gained 0.2 percent to 5.64 per dollar at 1:16 p.m. local time in Istanbul, trading at the strongest levels in three months.

Turkish President Recep Tayyip Erdoğan said that he was told by President Donald Trump at talks in Japan last weekend that Ankara would not face economic sanctions called for by other U.S. officials and politicians. The White House has yet to confirm Trump's comments.