June 4, 2018 / 9:19 AM / 2 months ago

UPDATE 2-Turkish inflation climbs in May, fuels rate hike expectations

(Adds analysts, Simsek, details, background)

By Daren Butler

ISTANBUL, June 4 (Reuters) - Turkey’s consumer prices jumped a higher-than-forecast 1.62 percent in May, official data showed on Monday, boosting expectations that the central bank will hike interest rates again at a policy meeting on Thursday.

At an emergency meeting on May 23, the central bank (CBRT) raised rates by 3 percentage points to support the ailing lira. The currency had tumbled after President Tayyip Erdogan, a vocal critic of high borrowing costs, said he would exert influence over monetary policy after Turkish elections on June 24.

After the inflation data, the lira rallied to below 4.6 against the dollar from 4.6563 at Friday’s close. It eased back to 4.6180 by 0845 GMT, 18 percent weaker this year.

“The market (is) interpreting this number as so bad, it is actually good in that it will leave the CBRT very little wiggle room at its next MPC meeting now not to hike again,” said BlueBay Asset Management strategist Timothy Ash.

“This is no longer about rates, but the very credibility of the CBRT and monetary policy more generally in Turkey after the incredibly damaging comments by Erdogan in London earlier last month,” he said.

In a Reuters poll, analysts had forecast the consumer price index (CPI) would climb 1.45 percent month-on-month. The Turkish Statistical Institute data showed the CPI jumped 12.15 percent year-on-year. Annual inflation stood at 10.85 percent in April.

“In the short term the inflation rise may continue due to base effects, but a falling trend will begin in the second half of the year with coordinated monetary and fiscal policy measures,” Deputy Prime Minister Mehmet Simsek said on Twitter.

Clothing prices rose 5.21 percent and transport prices 2.32 percent in May, driving the CPI rise, the data showed. Core “C” inflation, excluding energy, food, drink, tobacco and gold, rose to 12.64 percent year-on-year from 12.24 a month earlier.

Is Investment economist Muammer Komurcuoglu said the rise in core inflation would impact pricing behaviour negatively.

“Taking into account signals that the course of monetary policy will be closely linked to inflation, we think the central bank will go for a 100 basis point hike in its policy rate at its meeting this week,” Komurcuoglu said.

In a blow to market sentiment, late on Friday ratings agency Moody’s placed Turkey’s sovereign Ba2 ratings on review for a downgrade, while Fitch placed Turkish banks’ ratings on Rating Watch negative.

The yield on the benchmark 10-year bond rose to 14.85 percent from 14.47 percent on Friday. The main BIST 100 share index rose 1 percent to 100,170 points.

Additional reporting by Ezgi Erkoyun and Behiye Selin Taner; Editing by Tuvan Gumrukcu and Gareth Jones

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