July 3, 2019 / 8:04 AM / a year ago

UPDATE 2-Marked drop in annual Turkish inflation opens door to rate cut

* Annual CPI 15.72% in June, down from above 25% last year

* Rate cut could come in July, first since currency crisis

* Turkish lira still vulnerable to U.S. sanctions (Adds central bank context, graphic, confidence survey, comments)

By Ece Toksabay and Tuvan Gumrukcu

ANKARA, July 3 (Reuters) - Turkey’s consumer inflation fell to its lowest level in a year in June thanks to a high so-called base effect and a drop in food prices, potentially paving the way for the country’s first interest rate cut since last year’s currency crisis.

The consumer price index fell to 15.72% year-on-year, official data showed, almost matching a Reuters poll forecast of 15.74% and down from 18.71% in the previous month.

Month-on-month, inflation stood at 0.03% in June, slightly less than a poll forecast of 0.05%.

After having hovered around 20% for most of this year, the marked drop tmsnrt.rs/2YqlUzC in annual prices was largely because inflation began to sharply rise in June of last year - the measurement base effect - as Turkey's crisis took hold and forced the central bank to hike rates in September to 24%, where they remain.

Annual inflation hit a 15-year high in October above 25%, but later dipped.

Analysts said on Wednesday the central bank could ease monetary policy at a July 25 meeting if the lira, which briefly gained on Wednesday, is not hit this month by threatened U.S. sanctions over Turkey’s purchase of a Russian missile defence system.

“The inflation outlook will allow the central bank to start cutting rates in July,” said Erkin Isik, chief economist at QNB Finansbank. But he expects a cut of only one percentage point because - again due to base effects - inflation is expected to bounce back in July.

Food and non-alcoholic beverages prices fell 1.65%, marking the sharpest fall in the data set in June, the data from the Turkish Statistical Institute showed.

The producer price index rose 0.09% month-on-month in June for an annual rise of 25.04%.

Turkey’s lira shed some 30% of its value against the dollar last year, causing a recession to spill into this year. Sanctions over Ankara’s purchase of S-400 defences could prompt another selloff in the currency, pushing inflation higher.

“Any monetary policy moves hinge on what happens to the lira,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

“If the threat of sanctions escalates and the lira comes under pressure again in the coming weeks, the central bank will probably be forced to hold fire.”

Separately, a measure of consumer confidence jumped more in Turkey from the first to the second quarters than in any of the 64 countries in the Global Consumer Confidence survey, which was published on Wednesday.

“Respondents’ concern over the economy has declined, and their intention to spend their spare cash on paying off debts and credit cards have also declined,” said Abdul Erumban, senior economist at the New York-based Conference Board, which runs the survey.

“Yet given the economic situation in Turkey, we are still less enthusiastic that this high confidence will translate into actual spending.”

Additional reporting by Ezgi Erkoyun; Writing by Jonathan Spicer; Editing by Dominic Evans and Emelia Sithole-Matarise

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