Underlying inflation seen falling in Turkey

ISTANBUL – Turkey’s central bank said yesterday it expected underlying inflation to continue falling, although energy and food prices posed risks in both directions. In a statement following the release of higher-than-expected February inflation data on Monday, the central bank said food prices contributed around 1.4 percentage points to last month’s inflation. Excluding food, energy and tobacco components, annual inflation was continuing to approach the bank’s official year-end target of 4 percent, it said. Consumer prices rose by a higher-than-expected 1.29 percent in February for an annual rise of 9.1 percent, data from the Turkish Statistics Institute showed on Monday. «In the period ahead, there is expected to be a continuation in the fall in underlying inflation components but the risks in both directions from energy and food prices are expected to continue,» the bank said. Despite the continued positive trend in rent prices, rises in food and transport services prices limited the improvement in service price inflation, it said. Analysts said the Turkish central bank appeared to be relaxed by the sharp inflation rise because food and energy prices were the main drivers behind the increase. «The central bank is definitely running major risks by downplaying headline inflation which is now likely to overshoot the 2-6 percent target range once again this year,» said strategist Beat Siegenthaler at TD Securities in London. The producer price index rose 2.56 percent on the month for an annual rise of 8.15 percent. After the data was released, analysts said they still expected another interest rate cut before the central bank paused its easing cycle, because the spike in inflation was due to the rise in food prices. The bank has lopped a combined 225 basis points off the benchmark borrowing rate since September, unwinding sharp hikes carried out in 2006 amid an inflation shock and a slide in the lira. High rates helped slow growth to an annual rate of just 2 percent in the third quarter of 2007, but in 2008 the economy is forecast to grow around 5 percent. The bank had warned previously that poor weather in February could result in a large rise in unprocessed food prices.

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