Turkish Inflation Rate Slowed to 37-Year Low in July

Turkish Inflation Rate Slowed to 37-Year Low in July

http://www.bloomberg.com/apps/news?pid=20601085&sid=awnCxqWcxZ4E&refer=europe

By Steve Bryant


Traders at the Istanbul Stock Exchange Aug. 3 (Bloomberg) -- Turkish inflation slowed to a 37-year low in July, easing the way for the central bank to cut its benchmark interest rate later this year.

The annual consumer inflation rate fell to 6.9 percent from 8.6 percent in June, its fourth consecutive monthly decline, the statistics office in Ankara said on its Web site today. Prices were expected to rise 7.5 percent, according to the median estimate of 16 economists surveyed by Bloomberg. In the month, prices fell 0.7 percent.

Central bank chief Durmus Yilmaz said on July 27 that reducing the 17.5 percent interest rate, Europe's highest, was possible from October if the government curbs spending and inflation continues to slow. The high rates have cut demand for cars and home loans. Inflation has fallen from more than 70 percent in 2002 as Turkey's budget deficit narrowed under a $10 billion loan program with the International Monetary Fund.

``This is a seriously low figure and it's clearly a great encouragement for the central bank,'' said Ahmet Cimenoglu, head of strategic planning and research at lender Yapi & Kredi Bankasi AS in Istanbul. ``Nevertheless, I don't expect the bank to immediately start cutting rates, certainly not this month.''

While the inflation rate is the lowest since July 1970, it's still higher than the year-end target of 4 percent set under the IMF agreement. The bank aims to bring down the rate to 5.3 percent in September under the IMF plan.

Lira Gains

The Turkish lira gained 0.6 percent to 1.272 against the dollar, extending earlier gains. Yields on lira denominated bonds fell 12 basis points from immediately before the figures were released to 17.38 percent at 6 p.m. in Istanbul.

The ruling Justice and Development Party loosened budget discipline to increase spending on farms, roads and water pipes ahead of its July 22 landslide election victory. The bank won't reduce rates until it sees government efforts to compensate for that expenditure, Yilmaz said on July 27.

``Seeing a record low or close to it will help convince people that it really is falling,'' said Sengul Dagdeviren, economist for Oyak Bank AS in Istanbul, speaking before the figures were announced. ``Still, the bank's options are limited and they want to see what spending measures the new government will take. Cuts are very unlikely before October.''

Expectations for inflation are higher than the bank's 4 percent goal. The average forecast for inflation in 12 months was 6.4 percent in the bank's latest bi-weekly survey of businessmen and economists on July 20. The forecast was 6.3 percent in the previous survey.

Curb Demand

The central bank increased its benchmark rate by 4.25 percentage points in June and July last year to curb demand and slow inflation after a slump in the value of the lira threatened to increase import prices.

Passenger car sales fell 9 percent in June from a year earlier, the 13th consecutive month they've declined, the auto distributors' association said on July 6. Central bank figures show consumer loans grew about 25 percent in the past 12 months, one-third the pace of the previous year.

Turkish bankers including Suzan Sabanci Dincer, managing director of the second-biggest listed bank, Akbank TAS, say they expect falling interest rates to revive a boom in demand for loans that has attracted foreign lenders such as Citigroup Inc. and ING Groep NV to invest in the nation of 72 million.

GDP Expands

Turkish gross domestic product expanded an annual 6.8 percent in the first quarter of the year as record exports to the European Union and pre-election spending drove the 21st consecutive quarter of growth.

The lira has gained about 10 percent against the dollar so far this year and reached a high for the year of 1.24 to the dollar on July 24 after the Justice election victory.

The bank left rates unchanged at its last meeting on July 12. It meets again on August 14.

The banks preferred measure of core inflation, which excludes the prices of unprocessed food, energy, tobacco and alcohol, fell 0.6 percent in the month, the statistics office said.

The cost of goods leaving Turkish factories and mines rose an annual 2.1 percent in July, compared with 2.9 percent the previous month, the statistics agency said today. Producer prices rose 0.1 percent in the month.