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Turkey inflation at 41-year low in Feb

Ankara, March 3, 2011

Turkey's consumer inflation fell to a 41-year low in February but rising producer prices fanned anxiety the central bank may fall behind the curve if it fails to ditch its new policy mix as oil prices increase.

Consumer prices rose 0.73 per cent on the month and 4.16 per cent annually, data showed on Thursday, while the producer price index rose a monthly 1.72 per cent and 10.87 per cent in annual terms -- the highest since November 2008.

The consensus forecast in a Reuters poll had been for a monthly rise of 0.64 per cent in consumer inflation and 1.3 per cent on the producer index.

"While consumer prices were in line, producer prices were higher, and this is a signal of price pressure building. We have to be cautious," said economist Reinhard Cluse at UBS.

Analysts fear that the central bank's bold new policy mix of interest rate cuts to deter flows of hot money from abroad, combined with higher required reserve ratios to tighten the overall supply of cash to the economy, risks exposing a fast-growing economy to inflation shocks.

"In terms of monetary policy, today's numbers are neutral. There is no room to cut interest rates further in the near term, but there will be a need for significantly higher interest rates eventually," said Anders Svendsen, chief analyst at Nordea.

"We still see the first hike by the end of the second-quarter, which is supported by the upward trend in core inflation," he added.

The lira was unchanged at 1.613 against the dollar after the data. The yield on the benchmark Nov. 7, 2012 bond fell to 8.84 per cent from 8.85 per cent before.

Oil fears

Turkey has to import the vast majority of its oil and central bank Governor Durmus Yilmaz said last week the rise in global fuel costs to their highest in two and a half years created an inflation risk.

But he signaled February consumer price inflation would again be below the bank's year-end target level of 5.5 per cent and said that he wanted to allow the bank's new policies time to work.

After cutting rates by a total of 75 basis points and lifting reserve ratios in both December and January the bank held fire in February. Most analysts expect it to hold rates again in March, barring an oil price shock, but they is a growing consensus that it should abandon the new policy mix.

"The danger in my mind now is that we see a repeat of the events of 2005/2006 ... in the bank holding policy too loose for too long, and ultimately risking a forex sell-off and forced and aggressive monetary tightening in response," said Timothy Ash, analyst at Royal Bank of Scotland, in a note.

"In this scenario the bank would risk an erosion of much of the credibility that it has built up so painfully/steadfastly over the past five years," he added.

Turkey's currency has weakened some 6 per cent since the central bank changed its policy course, heightening the pain of higher oil prices.

That will negatively impact both the current account deficit and inflation, Turkey's economy minister said this week.

The central bank has forecast year-end inflation at 5.9 per cent but its forecast is based on an oil price of $95 per barrel while ICE Brent crude futures are now at $115.85. It has said it will update its end-2011 forecast in April and tighten if necessary -- without specifying if it will tighten with rate rises or through further increases to reserve ratios. – Reuters




Tags: Central Bank | inflation | Turkey | Ankara | low | February |

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