Turkey’s monetary policy committee is feeling vindicated. For months it has argued a spike in inflation was temporary: June’s inflation data, released this week, confirmed consumer prices had not just stabilised, but even fell 0.56 per cent last month.

The figures, showing annual inflation eased to 9.1 per cent from a peak of 10.2 per cent in April, boosted the Turkish lira and bonds. Combined with last week’s GDP data that suggested the economic recovery was losing momentum, they have also led most economists to defer expectations of higher interest rates to next year.

The volatility in inflation has been largely due to seasonal swings in food prices – a big component of the CPI basket in Turkey. But the central bank, in comments published on Wednesday, emphasized that core inflation had also eased, and a decline in services price inflation had become more pronounced – with rent inflation, one of the most persistent features of Turkish inflation, at a historic low.

This suggests that the central bank will use its next quarterly inflation report, due on July 27, to lower its forecast for year-end inflation from its previous call of 8.2 per cent. It is also likely to postpone the start of policy tightening, after signalling in its last quarterly report that rate rises could begin in the last quarter of 2010. Read more