Turkish inflation rose into double figures in December to hit its highest level in three years, topping poll forecasts and highlighting the challenge faced by the central bank in tackling growing price pressures and a weakening lira.

The central bank adopted a more aggressive monetary policy last week, partly in defence of a lira currency that had hit an all time low against the dollar, and the data released on Tuesday was not expected to trigger any change in stance.

Turkey's economy likely grew 8 per cent in 2011, and the headline inflation numbers and need to bring down a high current account gap underline the risk of a hard landing this year, though economists noted a reduction in core inflation was a positive sign.

The consumer price index climbed 0.58 per cent month-on-month in December, exceeding a Reuters poll forecast of a 0.30 per cent rise, for a year-on-year rise of 10.45 per cent, the Turkish Statistics Institute said. It was last around these levels in November 2008.

The annual figure was almost double the central bank's target of 5.5 per cent. The bank has said it expects inflation to fall back towards an end-2012 target of 5 per cent near the end of this year.

The producer price index also rose 1.0 per cent on the month, exceeding a forecast rise of 0.70 per cent, for an annual rise of 13.33 per cent.

"It appears that second round effects of rising inflation will be stronger than expected and the effectiveness of the Turkish Central Bank's current monetary policy mix is still questionable," said BGC Partners chief economist Ozgur Altug.

The benchmark bond yield rose 9 basis points to 11.57 per cent after the data. Shares were up 1 per cent while the lira eased slightly to 1.8893 against the dollar from 1.8875 beforehand.

Lira battle

The central bank has been battling to support a weakening lira and intervened aggressively in the foreign exchange market on Friday and Monday, selling dollars to support the Turkish currency. Analysts were sceptical its actions would have the desired effect.

Last Wednesday, the bank said it would sell more foreign currency directly to the market and provide lira liquidity at higher interest than usual when necessary.

While Turkey was one of the world's best performing economies in 2011 the lira lost nearly 22 per cent against the dollar as the central bank pursued a complex policy mix of lower interest rates, higher bank reserve requirement ratios and a wider gap between lending and borrowing rates to counter a huge current account deficit.

December inflation was driven by food prices which rose 1.97 per cent, while there was a 2.2 per cent seasonal decline in the clothing segment and core inflation was more favourable than expected, said Ekspres Invest chief economist Nilufer Sezgin.

Annual core-I inflation receded to 8.1 per cent from 8.2 per cent and annual services inflation retreated slightly to 6.4 per cent from 6.6 per cent.

"Therefore, despite the high headline inflation, the underlying inflation outlook is more benign than thought and it is probably even more favorable than the central bank's own forecasts," Sezgin said, forecasting that the bank's recent additional tightening would remain in place.

In October, the central bank began tightening monetary policy to curb the lira's depreciation and its impact on inflation. The bank's policy rate, the one-week repo rate, stands at 5.75 per cent and the upper limit of its interest rate corridor is 12.5 per cent.

Despite the measures, the lira hit a record low of 1.9215 against the dollar last Wednesday.

"I expect the central bank to raise its daily funding rate, and (it) may continue with intraday repo auctions," said Oyak Securities chief economist Mehmet Besimoglu. "It may also widen the rate corridor in the coming months. I don't expect the bank to adopt a classical policy.”

He forecast that first-quarter inflation would be around 11-12 per cent and would dip to 8 per cent by end-2012. – Reuters