Government welcomes further fall in Turkey's inflation rate

ANKARA

Deputy Prime Minister Mehmet Şimşek has welcomed a drop to single digits in Turkey’s inflation rate, predicting a sharper fall to below 7 percent next year. 

 “It is good that the inflation rate is back to single digits. I believe it will remain at single digits by the year-end before taking a more rational path, under 7 percent,” Şimşek said during a live interview on broadcaster NTV on Aug. 3.

He was speaking shortly after the Turkish Statistical Institute (TÜİK) announced that monthly inflation rose by 0.15 percent in July over the previous month but annual inflation dropped to 9.79 percent, its lowest level in six months.

Consumer price inflation fell by 1.1 points, down from 10.9 percent in June.

”I believe that the new path driven by the Central Bank is realistic. The market’s trust in this important,” Şimşek also said. 

“The market believes in our sincerity. Otherwise lending rates would not stand at 11.5 percent when inflation is around 10 percent. We will not let down investors, or local and foreign actors who follow Turkey and our citizens,” he added. 

The government has already taken measures to push the inflation rate down, which was mainly driven by high food prices, Şimşek said new measures were in the pipeline. 

“We will launch a very serious structural measures package. We have taken some partial steps and introduced some incentives for the supply chain,” he said, adding that a food committee, founded to control price hikes, will fine-tune the planned reform. 

The reforms will include incentives for cold storage and supply chain investments that will reduce wastage for the private sectors, he added. 

The Central Bank’s year-end forecast for the inflation rate is 8.7 percent, and Şimşek said he hoped it would indeed be under 9 percent. 

He also noted that an increase in global oil prices had added to the high inflation. 

TÜİK on Aug. 3 showed the highest monthly rises were in the hospitality sector, with hotels, cafes and restaurants seeing a 1.75 percent increase in prices.

Transport prices rose 15.24 percent, making it the main reason for annual inflation.

Commenting on the new rates, Timothy Ash, a senior emerging market strategist at the London-based BlueBay Asset Management, said that although Turkey’s headline inflation, which includes commodities such as food and energy prices, dropped to 9.79 percent in July, the core inflation rate, which strips out volatile food and energy prices, actually rose from 9.2 percent to 9.6 percent.      

“The Producer Price index [PPI] was also higher, rising to 15.45 percent from 14.87 percent. So it’s better than the expected headline, but disappointing core/PPI,” Ash told Anadolu Agency. 

“The Turkish Central Bank this week noted that over the autumn we might see inflation spike back up, as some of the consumption tax cuts roll off, but then drop back at year’s end on high base period effects,” he added, noting that the core print would still suggest the Central Bank has little near term scope to loosen policy.

Central Bank Governor Murat Çetinkaya stated on Aug. 2 that inflation was likely to follow a fluctuating course in the second half and it was projected to recover starting from the last month of the year.  
   
The Central Bank raised its end-2017 inflation forecast to 8.7 percent, Çetinkaya said during the latest monetary policy committee meeting.      

Enver Erkan, analyst at KapitalFX, also noted that although inflation had dropped to single digits as expected, keeping it at that level throughout the year would be difficult.

“Most probably, inflation will remain at some level above 10 percent and will decline to single digits again in December, thanks to base effect of the previous year. We expect a year-end inflation of 9.30 percent,” Erkan said.

He added that food prices seemed to go lower in July, with the help of fresh fruit and vegetables and the Food Committee’s short-term measures such as imports and price ceiling.      

“However, red meat prices remain at high levels. Transportation prices increased significantly with the effect of higher oil prices and the rise of transportation prices in Istanbul,” Erkan said.

He noted that analysts expect the monetary policy of the Central Bank to be tight in the remaining months of the year.

“If the structural adjustments have a significant effect on inflation, the Central Bank would consider the opportunities of a looser monetary policy by first loosening the liquidity situation then cutting the policy rates,” Erkan said. “It is time to wait and strengthen credibility before 2018.”