UPDATE - Turkey: Annual inflation goes up in March

ADDS ANALYSTS’ COMMENTS AND BACKGROUND

ANKARA (AA) - Turkey's annual inflation rate increased in March, the Turkish Statistical Institute (TurkStat) announced Monday.

Consumer prices in Turkey rose 11.29 percent year-on-year in March from 10.13 percent in February, TurkStat said.

Meanwhile, monthly inflation also climbed 1.02 percent in the third month of the year over the previous month, higher than experts' predictions.

The median estimate of the inflation expectation survey prepared by Anadolu Agency’s Finance Desk was a 0.54 percent advance on a monthly basis and 10.77 percent on an annual basis.

The report showed that the highest monthly increase was in clothing and footwear, 1.99 percent, while the main drivers of yearly consumer price inflation on an annual basis were alcoholic beverages and tobacco, together up 21.71 percent.

The sharp increase did not come as a large surprise, as the Central Bank recently forecast in a report that inflation would uptick in the short term.

The Survey of Expectations for March 2017 report, done with the participation of 76 professionals and senior managers of the real and finance sector, found professionals’ median estimate for year-end consumer prices inflation was 9.08 percent.

“Pass-through from recent exchange rate developments may lead to upside inflationary pressures in the short term; yet, with the support of the tight monetary stance, inflation is expected to trend downwards by mid-year,” said Central Bank Governor Cetinkaya in releasing the report.

But analysts warned a sharp increase in the reading may force the Central Bank to raise rates higher even if the April 16 constitutional referendum spearheaded by President Recep Tayyip Erdogan is a success, a scenario which would ease political uncertainty.

“A very significant deterioration, and shows impact of earlier FX weakening I think. Suggests the pressure will be on the Central Bank to keep policy rates high even in a scenario where Erdogan secures a Yes vote on April 16,” economist Timothy Ash from BlueBay Asset Management said.

The Central Bank has introduced many unorthodox measures since late January to stem the decline in the local lira currency as its depreciation pushed consumer prices higher.

Thanks to measures taken by the bank, the average cost of funding for Turkish lenders climbed to 11.3 percent, without raising key rates such as the one-week repo rates and overnight rates.

In the early morning, the Central Bank skipped repo financing to banks, which is expected to push the average cost of funding to 11.5 percent.

“The rising trend in both headline and core inflation shows the exchange rate pass-through effects of depreciation of the lira. As the rise in producer prices is ongoing due to higher input prices, it means we will see these pass-through effects in the coming months,” analyst Enver Erkan from KapitalFX said.

“Depreciation of the lira was eased and course of FX rates stabilized thanks to tightening steps of the Central Bank. But we don’t see these measures reflected in inflation. This complicates the Central Bank’s possible course of action,” he added.