Ozgur Altug Comments: Turkish inflation expectations improve but no immediate rate cut seen

December 22, 2014, Business Recorder

ISTANBUL: Oil and commodity price falls have helped bring down inflation expectations in Turkey, a central bank survey showed on Friday, although economists expect no immediate interest rate cuts.
The average forecast for year-end inflation fell to 9.02 percent from November’s 9.22 percent in the bank’s monthly survey of business leaders’ and economists’ expectations.
Inflation in 12 months’ time was seen at 7.21 percent, down from 7.5 percent in last month’s survey. But despite the optimism, only one of 18 economists in a Reuters poll expect the central bank to cut interest rates at its policy meeting on Dec. 24. "Inflation expectations started to improve and we think that the improvement will continue on the back of collapsing commodity prices," Ozgur Altug, chief economist at BGC Partners, said in a note to clients.
"However, 12-month CPI inflation expectations, which are now at 7.21 percent, tell us that there is still a big credibility gap for the central bank," he said.
Economists lowered their growth forecasts for this year to an average of 3.0 percent from 3.2 percent a month ago in the central bank survey, after growth slowed more sharply than expected in the third quarter to 1.7 percent.
Central Bank Governor Erdem Basci said last week that falling oil prices could help inflation drop near to 5 percent next year, suggesting the bank would have more room to deliver the interest rate cuts President Tayyip Erdogan has long called for.
The ruling AK Party has built much of its reputation on strong economic management over the past decade. Erdogan, who takes the view that high rates cause inflation, has repeatedly called for cuts to support growth, particularly ahead of a general election in June. But a slump in the lira in recent days driven by a sell-off in emerging markets, plus investors’ nerves about domestic politics may delay such a move, for this year at least.
"We continue to believe that the Bank will deliver 50-75 basis point rate cuts in the first months of 2015 when annual CPI inflation will fall sharply mainly on favourable base effects," Altug said.