Energy costs to boost Turk inflation in short term, says central bank

ISTANBUL (Reuters) – Rises in electricity and gas prices in Turkey will have a negative impact on inflation, but in the medium term inflation is expected to keep falling, Turkey’s central bank said on Friday. Analysts said the bank’s apparent lack of concern over a rise in inflation left the door open for a 50-basis point rate cut at its next meeting on January 17. Annual inflation ended 2007 at more than twice the bank’s 4 percent target. «While rises in electricity and natural gas prices will have a negative impact on inflation, in the medium term it is expected that the fall in inflation will continue,» the bank said in a statement on December inflation data. «In January annual energy basket inflation will rise clearly under the impact of the electricity and natural gas price rises.» The bank said it would closely watch the impact of value-added tax cuts in January while it said higher processed food prices would continue to have a negative impact on CPI components. Official data on Thursday showed the consumer price index rose 0.22 percent in December, just below a Reuters poll forecast of 0.30 percent. Annual consumer inflation stood at 8.39 percent in December, twice the target but still softer than the 9.65 percent rate seen at the end of 2006. The inflation-targeting central bank has cut the benchmark borrowing rate four times in as many months, taking the overnight rate to 15.75 percent, and analysts expect another cut this month. «We believe that near-term risks posed by energy price hikes and rising core inflation argue for slowing the pace of monetary easing; hence our call for a 25 bps cut at the MPC’s next meeting,» said Inan Demir, economist at Finansbank. «However, given the central bank’s continuing confidence in disinflation, another 50 bps cut is still on the table.» The government announced last week that it was raising power prices, effective from the start of this year, in response to rising costs after keeping them steady for more than four years. Economy officials said the electricity price increases of 15 percent for households and 10 percent for industry will effectively amount to 19.5 percent and 12 percent respectively when adjusted for inflation.