Turkish inflation quickens, strains central bank rates plan

Inflation in Turkey accelerated to almost double the official target as the central bank sells dollars and squeezes liquidity to halt a decline in the lira that’s pushing prices up.

The inflation rate rose to 10.5 per cent in December from 9.5 per cent, the statistics agency in Ankara said on its website today. That was the fastest rate since November 2008. The year- end goal was 5.5 per cent and the median estimate of seven economists in a Bloomberg survey was 10.1 per cent. In the month, prices rose 0.6 per cent.

Inflation has surged from 4.3 per cent when Erdem Basci took over as central bank governor in April. Basci is pursuing a policy of varying interest rates on a daily basis to help manage volatile capital flows. He said yesterday that the bank has applied “additional tightening” since last week, when the lira fell to a record low that extended its drop against the dollar to 18 per cent for the year.

“The effectiveness of the central bank’s current monetary policy mix is still questionable,” Ozgur Altug, chief economist at BCG Partners in Istanbul, said in an e-mailed comment. “While we expect the bank to insist on the current policy, we also think that annual inflation will be 8.4 per cent at the end of 2012 against the inflation target of 5 per cent.”

Yields on benchmark two-year lira bonds traded at 11.42 per cent at 10:30am in Istanbul, after rising to a two-and-a- half-year high of 11.57 per cent following the inflation release. The lira was 0.5 per cent stronger at 1.8861 per dollar.

The central bank has restricted the funding it provides at the benchmark interest rate of 5.75 per cent, forcing banks to borrow at as much as 12.5 per cent. It also sold dollars on the market for a second consecutive trading day yesterday, and has spent more than $11 billion of reserves since July.

“The bank is stretching the limits of its unorthodox policy framework in order to stabilize the lira and bring inflation under control,” Goldman Sachs Group Inc economist Ahmet Akarli wrote in an e-mailed report today. “More policy action will be necessary.”

The lira, along with South Africa’s rand, was the biggest decliner last year among emerging market currencies tracked by Bloomberg. Its drop has added as much as four per centage points to inflation, Basci said on December 27.

Basci hasn’t changed the benchmark rate since he cut it by half a percentage point in August. Adjusting policy through market operations and sales of foreign currency gives the bank the agility it needs to respond to rapid changes in capital flows because of the European sovereign debt crisis, he says.

It’s essential that the additional tightening be “strong, effective and temporary,” the central bank said yesterday. The duration depends on the speed of the correction in factors that affect inflation, it said.

This year’s 5 per cent goal is achievable because inflation will start slowing from May, according to the bank’s projections. Its preferred measure of core inflation slowed to 8.1 per cent in December from 8.2 per cent the month before.

The central bank is working to achieve a “soft landing” for Turkey’s economy, which grew 8.2 per cent in the third quarter, Basci said on December 12. Annual credit expansion slowed to 31 per cent in the week to December 23, from 32 per cent a week earlier, the bank regulator said yesterday. The central bank has said it wants to see loans growing at about 25 per cent.

The cost of goods leaving Turkish factories and mines rose 13.3 per cent in the 12 months through December, from 13.7 per cent the previous month, the statistics agency said today. Producer prices rose 1 per cent in the month.