March 3, 2020 / 7:38 AM / a month ago

UPDATE 2-Inflation's rise tests Turkish recovery in face of Syria conflict

* Inflation up four straight months after dramatic drop

* Weakening lira could keep prices elevated

* Standoff with Russia in Syria raises macro risks

* Central bank could halt easing despite political pressure (Adds graphics, comments, broader risks)

By Ali Kucukgocmen and Jonathan Spicer

ISTANBUL, March 3 (Reuters) - Turkey’s key inflation gauge rose for a fourth straight month to 12.37% in February, data showed on Tuesday, testing the central bank’s resolve to keep stimulating the economy in the face of a weakening lira and a worsening conflict in Syria.

The rise in both yearly and monthly consumer price measures was less than expected, according to the Turkish Statistical Institute, which could leave the bank optimistic tmsnrt.rs/3aQDXp8 that inflation will reverse and dip toward 8.2% by year end.

Many analysts still expect the central bank to ease monetary policy this month after it has aggressively cut the key interest rate tmsnrt.rs/2IecJvJ to 10.75% from 24% in July. The government has pushed for single-digit rates to boost a rebound from recession.

But Turkey's standoff with Russian and Syrian government forces in Syria's Idlib region, combined with investor concern tmsnrt.rs/38i1Gw1 over the global coronavirus spread, has sliced the Turkish lira's value by more than 4% so far this year.

That in turn could keep inflation elevated, especially via expensive imports, and bring about a halt to the easing and even set the stage for rate increases despite the political pressure, analysts say.

“It creates a vicious cycle” of rate cuts, falling lira and high inflation, said Jason Tuvey, London-based senior emerging markets economist at Capital Economics. “In so far as the conflict in Syria continues to escalate and investors might need to steer clear of Turkish assets.”

A currency crisis in 2018 sparked a recession and sent Turkish inflation surging to a 15-year high above 25%. It has since dropped dramatically and briefly touched single digits late last year, before climbing again to above 12%.

A Reuters poll forecast annual inflation would rise to 12.70% in February. In January, it was 12.15%.

Month-on-month, consumer prices rose 0.35% in February, also lower than a poll forecast of a 0.65% rise.

GLOBAL EASING

The lira gained briefly after the data but resumed a slide to 6.1915 against the dollar. Markets globally rose on hopes the U.S. Federal Reserve and other major banks would counter any slowdown related to coronavirus.

Easing last year by the Fed helped steady the lira and clear the way for Turkey’s rate cuts, and any further global easing could keep the Turkish cycle on track in coming months.

While President Tayyip Erdogan has continued to press for single-digit rates, a separate Reuters poll sees the bank cutting to only 10% by year end.

Economists also see 10% inflation by year’s end, according to the first poll, higher than that of the government and the bank, which targets 5% inflation.

Economic growth jumped to 6% in the fourth quarter, after three straight year-over-year contractions to mid-2019. But the trade deficit has since widened to 44% in February, and the Syria operation raises other risks for the economy.

There is “now be a reasonable chance that relations with Russia deteriorate to such an extent that Moscow” imposes a tourism and trade ban on Turkey, said Timothy Ash of BlueBay Asset Management.

Deutsche Bank analysts said markets have recently raised the odds of a Turkish rate hike tmsnrt.rs/2uOZv5j, even while peer countries are more likely to cut rates due to the coronavirus's spread.

The February inflation rise was driven by food and non-alcoholic drink prices, which surged 2.33% month-on-month, as well as health-sector prices. Clothing and shoe prices declined 4.83%, the data showed.

The data also showed the producer price index rose 0.48% month-on-month in February for an annual rise of 9.26%.

Additional reporting by Ezgi Erkoyun in Istanbul and Marc Jones in London; writing by Jonathan Spicer; editing by Larry King

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