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Turkey’s slowing inflation unlikely to bring early rate cut

Turkey’s slowing inflation unlikely to bring early rate cut

ANKARA: Turkey’s consumer inflation rate dropped the most in more than a year but with the gauge still well above the central bank’s year-end forecast, there’s little prospect monetary policy will be eased soon. The annual rate fell to 10.9% in June from 11.7% the previous month, slowing more than the median estimate of 11.2% in a Bloomberg survey of analysts. The monthly drop was the biggest since April 2016.

After price gains began descending in May, some economists signalled the central bank could begin an easing cycle with Nomura expecting the first cut last month. But instead the regulator has kept the cost of cash at elevated levels and pledged last month to maintain its policy stance. Expectations have since been re-calibrated. “June’s price developments may have increased the bank’s confidence that inflation might slow to its year-end forecast of 8.5%,” Istanbul-based Odeabank economist Sakir Turan said. “But they will wait until inflation stabilises at single-digit levels before they begin lowering the cost of funding.” The central bank’s target for inflation is 5%. The cost of central bank funding was 11.98% on June 30, the highest level in more than six years, according to data compiled by Bloomberg.

Last month’s inflation slowdown was largely driven by food and energy costs. Food prices, which account for more than a fifth of the basket, rose 14.3% through June, down from 16.9% a month earlier. Energy inflation was 7.6%, down from 8.7% in May. Monthly inflation recorded its first negative reading since August 2016. The slowdown in food, which had the biggest impact on headline inflation, was mostly due to recent government measures including tax cuts on some imports, Burak Kocak, Denizbank executive vice-president in charge of agricultural banking, said on BloombergHT television. Core prices, which exclude volatile items such as food and is seen by many monetary policymakers as an indication of underlying inflation pressures, rose 9.2% through June, down from 9.38% a month earlier.

Any rate cut would probably be preceded by either a change in the verbal guidance issued by the central bank, or tweaking some of the fringe tools it has adopted since January, according to QNB Finansbank economist Deniz Cicek. “We can assume that tight policy will continue in the absence of any indication otherwise,” Cicek said. Such a signal “could be in the form of a reversal in steps taken earlier this year such as lowering the amount of FX swaps” offered to commercial banks.