beyondbrics

Turkey’s monetary policy committee will breathe a sigh of relief at today’s data showing lower food prices brought inflation back into single digits last month.

Consumer price inflation fell to a year on year rate of 9.1 per cent in May, lower than analysts expectations and down from 10.2 per cent in April. Easing price pressures were largely due to falling food costs, as spring fruit and vegetables came to market and the government eased import quotas to bring down sky-high prices for red meat.

For months, the central bank has been assuring sceptical investors that a spike in inflation was temporary, but market expectations for inflation remained well above the bank’s forecasts and its medium term target of 5.5 per cent.

The International Monetary Fund this week urged Turkish policymakers to accelerate the pace of monetary tightening, “in view of elevated inflation expectations and rapidly growing bank credit”, in early conclusions from Article IV consultations.

However, the central bank’s expectation of improving inflation suggest it will remain “firmly in the lower for longer camp” on interest rates, according to Tim Ash, economist at the Royal Bank of Scotland, who thinks market participants could “significantly revise down expectations for rate hikes over the next 12 months.”

But economists disagree as to whether inflation will continue on this benign course.

Tevfik Aksoy, at Morgan Stanley, forecasts consumer prices will rise 7.6 per cent in 2010 and a more modest 6 per cent in 2011. Yarkin Cebeci at JPMorgan lowered his forecast for year end inflation to 7.2 per cent and said that as there was further scope for declines in food and energy prices, he would also revise interest rate forecasts.

But Ahmet Akarli and Jonathan Pinder at Goldman Sachs wrote:

“While inflation is likely to decline until year end due to base effects, it is nonetheless likely to remain well above the CBRT’s mid-term 5.5% inflation target… The fundamental drivers of sticky inflation – high and sticky inflation expectations and a rapidly narrowing output gap remain firmly in place.”

Murat Ucer, analyst for the consultancy Global Source, wrote:

“The outcome will surely please the monetary policy doves, most notably the Central Bank, and has already boosted morale in the bond market. But one should nevertheless not lose perspective. Food prices have been very volatile historically… and hence today’s boon can be tomorrow’s bane. Second, once we take a step back… inflation is still nearly twice as high as the Central Bank’s medium-term target of 5% and we remain doubtful it will be able to lastingly break through the 7%-8% range.”

So enjoy the cheaper kuzu güveç while you can.