Rising Inflation Challenges the Central Bank

UNCLAS ANKARA 002895 SIPDIS TREASURY FOR INTERNATIONAL AFFAIRS - JROSE SENSITIVE SIPDIS REF: ANKARA 685 E.O. 12958: N/A TAGS: EFIN TU SUBJECT: Rising Inflation Challenges the Central Bank ¶1. (SBU) Summary: Turkey's headline consumer inflation was 1.95 percent in November, considerably higher than the 1.58 percent consensus estimate, and this result surpassed even the most pessimistic economic forecasts. Core indicators were not encouraging and non-food inflation picked up sharply. Oil price increases hit hard in Turkey, which imports an annual average of $30 billion. The Central Bank (CBRT) inflation target is four percent and year-on-year November inflation was 8.40 percent. If the CBRT yields to political pressure to cut rates at the December 13 Monetary Policy Committee (MPC) meeting, inflation could continue to spike and the CBRT's credibility could be questioned. End summary. ¶2. (U) Turkey's November consumer price index (CPI) increased 1.95 percent; while the producer price index (PPI) increased 0.89 percent. Year-on-year November inflation reached 8.40 percent for CPI and 5.65 percent for PPI. Year-to-date inflation was 8.15 percent for CPI and 5.78 percent for PPI. The GOT's CPI target for 2007 is four percent. ¶3. (U) Overall inflation news was negative, however, in a December 4 statement the CBRT claimed the medium-term inflation outlook was still on track despite short-term variations. ¶4. (SBU) Comment: According to market participants and the CBRT, the main short-term inflation risk is the government's upcoming decision regarding electricity and natural gas prices. Despite inflation pressures, many investment banks believe the MPC might continue to cut the main policy rate by 25-50 basis points on December 13. The Bank's short-term lending rate is now 16.66 percent. CBRT has been receiving pressure from politicians since the beginning of the year to cut rates to stimulate economic growth. CBRT should balance these concerns against inflation pressures and take into account global economic conditions before making its rate decision. End Comment. Wilson