Turkey’s annual inflation rate fell to its lowest level in four months in June, easing pressure on the central bank to fight price growth. The rate retreated from 11.72% in May to 10.90% in June having hit 11.87% in April, a level which was the highest recorded since October 2008, national statistics agency TUIK announced on July 3.

Analysts will take the lower inflation figure as an early sign that the stabilisation of the Turkish lira in recent months is reducing pressure on prices.

Since the failed attempt at overthrowing the government last year, Turkish ministers have been pushing stimulation efforts to boost economic growth. Measures including more bank lending at cheaper rates have been pursued, even though strong domestic demand supported by loans carries with it the risk of higher inflation as well as higher current account and budget deficits. 

The June inflation figure is in line with expectations for a limited recovery over summer months from April's peak point. However, annual inflation is still rather high and political pressure on the central bank to cut policy rates amid high inflationary pressures increased following the April 16 referendum on introducing an executive presidency.

At the latest monetary policy committee (MPC) meeting held on June 15, Turkey’s central bank kept all its policy rates on hold. The next MPC meeting will be held on July 27.

As inflation and exchange rate-related risks remain high, a direct increase in the policy rate is needed, the OECD advised in its June Economic Outlook forecast published on June 7 as it raised its 2017 CPI inflation forecast for Turkey to 10.4% from the previous forecast of 7.7% anticipated in its November 2016 outlook report.

Consumer prices in June fell 0.27% m/m following a 0.45% m/m rise in May. 

The lira had lost 0.44% d/d against the USD to trade at 3.5363 as of 12:30 local time on July 3, following the release of the inflation data. The benchmark BIST-100 was up 0.33% to 100,774.

Food inflation, which has the highest weight of 21.77% in the inflation basket, slowed to 14.34% y/y in June from 16.91% in May.

The annual rise in the C-index, one of the central bank’s favourite core inflation indicators, declined to 9.20% in June from 9.38% in May.

The outlook on the domestic producer price front was similar. Annual inflation in domestic producer prices slowed further to 14.87% in June from 15.26% in May.

Previously, producer price inflation tracked a seven-month long trend of escalation, rising from September 2016’s 1.78% to April’s eight-year high of 16.37%, moving in parallel with the lira’s depreciation.

In May, Turkey’s central bank revised up its end-year inflation expectation for 2017 to 8.5% from its previous forecast of 8%. The World Bank is forecasting a quickening of annual inflation to 9% at the end of 2017 from last year’s 8.5%.

The IMF predicts that Turkey’s CPI inflation will come in at 10.1% for this year but decline to 9.1% in 2018.

Inflation would start falling in May and would end the year at 8.5% or below, Economy Minister Nihat Zeybeci predicted in April. Turkey will see single-digit inflation by the end of 2017, Deputy Prime Minister Nurettin Canikli told reporters in London on May 3.

Turkey will refrain from hiking taxes in 2017 in an effort to contain inflation, Finance Minister Naci Agbal told Reuters in an interview on June 30.

Fitch Ratings expects base effects to keep inflation in double digits into the final quarter of 2017, the rating agency said in the latest edition of its Global Economic Outlook report published on June 19. Its inflation forecasts for this year and next stand at 9.5% and 7.5%, respectively.

S&P Global Ratings expects inflation in Turkey to moderate over the forecast horizon through the year-end of 2020, but it said in May that “given the lira's volatility, risks remain that the Turkish central bank's monetary policy response may prove insufficient to anchor its inflation targeting regime, particularly if domestic or geopolitical instability were to flare up in the coming months”.