Turkish May consumer prices below forecast as core inflation drops

The data was seen giving more leeway to new Governor Murat Çetinkaya after the bank cut the top end of its interest rate corridor for the third straight month in May amid cooling inflation and political pressure for lower rates.

The month-on-month consumer price rise was lower than a 0.78 percent forecast in a Reuters poll. Year-on-year consumer prices rose 6.58 percent, up one basis point from a near three-year-low a month earlier, the Turkish Statistics Institute (TÜİK) said.

“Today’s figure is likely to motivate the (Central Bank) for another 50 basis points cut on June 21, unless global sentiment deteriorates by then,” said Finansbank economist Gökçe Çelik.

However the U.S. Federal Reserve will meet before the Turkish monetary policy committee meeting and any moves or signals on interest rates there could trigger a re-pricing of emerging market assets that might affect Turkish policy action.

JP Morgan economist Yarkın Cebeci said inflation surprised on the downside for the fourth consecutive month, leading to a significant improvement in inflation expectations.

“Importantly, while the surprises were due to lower food prices in the previous three months, this time lower core inflation was the main factor,” he said.

Analysts highlighted the drop in core “I” inflation to 8.8 percent year-on-year from 9.4 percent in April.

Previous lira depreciation had pushed up core inflation in past months and these effects were now unwinding.

Food and non-alcoholic drinks prices fell 1.64 percent on the month, while clothing and shoes prices rose 8.04 percent.

“Headline inflation is likely to remain relatively low over the next few months. And policymakers will use this opportunity to ease monetary policy further,” said Capital Economics emerging markets economist Liza Ermolenko.

She forecast that the overnight lending rate would be lowered to 8.50 percent by the end of the year from 9.50 percent currently.

“The headline rate should start to rise again next year. Underlying price pressures in Turkey remain strong, and we expect the headline rate to breach 8 percent in 2017,” she added.

Domestic producer prices rose 1.48 percent on the month for an annual rise of 3.25 percent, the data showed.