Joe Parkinson The Wall Street JournalTurkey’s central bank rate-setters may have been grateful that the wave of protest engulfing Egypt and other Arab states shifted the market’s attention away from their controversial monetary policy plan this week. Until Thursday, perhaps.
Thursday saw the Turkish statistics institute announce that consumer price inflation in Turkey decelerated to 4.9% on the year in December, comfortably below the central bank’s target and marginally lower than expectations. The figure marks the lowest annualized rate of price growth since 1968 when student protest movements were erupting across Europe and Turkey’s current central bank Governor Durmus Yilmaz had just turned 21.
Most analysts say that Turkey’s benign consumer price increase represents a “farewell gift” to Mr. Yilmaz shortly before he leaves office in April, and means the risks to the bank’s unorthodox strategy to cut benchmark lending rates while simultaneously hiking banks’ reserve ratios remain limited.
Tevfik Aksoy, an economist at Morgan Stanley, says the low inflation rate means the central bank’s “creative” monetary policy strategy will only face “minor risks” if Turkey avoids a major external shock.
“This achievement will be associated with Governor Durmus Yilmaz’s name in the future,” he says.
Gone, it seems, are the bad old days of the 1990s when inflation soared into triple digits, erasing consumers’ savings.
That may be, but perhaps the central bank won’t be too fussed that Turkish assets didn’t leap in celebration because beyond the headline data it wasn’t all good news.
Inflation excluding volatile items—a key indicator of future price moves—gathered momentum in December, while producer price figures released separately on Thursday surprised on the upside, fanning fears of higher inflation later in the year.
That could give the Turkish central bank less room for maneuver—which is particularly important for its strategy of cutting benchmark interest rates to curb the inflow of speculative investments, while hiking banks’ reserve ratios to rein in a gathering credit bubble.
Rapid price rises could mean the bank would have to raise rates in tandem, potentially attracting the hot money investments they were looking to curb. Surging oil prices in particular could magnify Turkey’s key economic weakness—its high current account deficit—as Turkey imports oil and therefore oil price inflation.
HSBC economist Murat Ulgen says cost pressures may have spoiled the central bank’s party, and stresses that the market are on high alert for signs that inflation could spike.
“Turkey’s inflation has fallen to nearly a five-decade low level… However, this encouraging outcome will likely be overshadowed by increasing cost and supply-side pressures owed to weaker lira and rampant global commodity prices.”