Turkey’s annual inflation rate eased to 7% in November from 7.2% a month earlier, data from statistics office TUIK showed on December 5.

The reading sees inflation easing for the fourth straight month in November to its lowest level since May and defying market expectations for price growth to accelerate to 7.4%. The surprise fall suggests is it less likely the Turkish central bank will follow up last month’s interest rate hike with another this month, analysts at Capital Economics said in a note. Still, they point out that the lira is likely to remain the key driver of interest rate decisions in Turkey. “Nonetheless, with the recent weakness of the lira yet to fully feed through to prices, we expect inflation to rise sharply in the coming months,” the analysts suggest. 

On a monthly basis, consumer prices edged up 0.52% in November, below the market consensus for a 0.8% m/m increase. The lira gained ground against the dollar on the better-than-expected inflation data. The currency hit a fresh low of 3.5600 against dollar ahead of the data release, but strengthened to 3.5460 as of 10:15am Istanbul time. Later in the day, however, the lira gave up some of its gains as other worries – the debate around the presidential system, geopolitical risks, the large current account deficit, and tensions with the EU - still keep the lira under pressure. The lira trading at 3.5408 as of 10:40am Istanbul time. The main stock exchange index, BIST-100, was down 0.18%.

The question is whether the central bank will use the easing inflation as a pretext to cut its rates to stimulate economic growth and consumption when its monetary policy committee meets on December 20. Turkish President Recep Tayyip Erdogan has made repeated calls for lower rates as the economy shows signs of a sharp slowdown.

The slowdown in price growth in November came as food prices declined by 0.58% m/m, shedding 0.14 percentage points (pp) from the headline inflation rate, in line with central bank expectations. Clothing prices increased 3.89% m/m, making the largest contribution to the headline figure with a 0.29pp contribution, while housing prices rose 0.87% m/m, adding another 0.14pp. Alcoholic beverages and tobacco prices edged up 0.01%. However, it should be noted that the government last week hiked the fixed tax on alcohol and tobacco products which Finance Minister Naci Agbal says will add 0.26 basis points to inflation. The November data apparently fails to reflect the impact of the tax adjustment on inflation. Transport costs rose by 0.49% m/m in November, adding 0.07pp to the headline figure.

The increase in the so-called I-index, one of the central bank’s favourite indicator of core inflation, slowed to 0.84% m/m in November from 1.61% m/m in the previous moth, bringing the annual increase rate down to 6.99% from 7.04%.

Domestic producer prices increased by 2% m/m in the month versus 0.84% in October. The annual rise in domestic producer prices picked up to 6.41% from 2.84%, TUIK said.

Turkey's CPI Inflation (y/y)
	Weights	Dec-15	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov
Headline	100	8.81	6.57	6.58	7.64	8.79	8.05	7.28	7.16	7.00
Food and non-alcoholic beverages	23.68	10.87	1.38	2.47	6.63	9.69	6.19	4.16	5.20	3.55
Alcoholic beverages and tobacco	4.98	5.68	12.84	12.79	12.80	19.36	23.03	22.61	22.61	22.61
Clothing and footwear	7.43	8.99	9.32	7.32	7.31	8.26	7.84	7.03	6.07	4.59
Housing, utilities	15.93	6.71	6.59	6.51	6.68	6.69	6.82	6.64	5.53	5.87
Furnishings, household equipment	8.02	10.95	10.38	9.18	9.75	8.21	8.25	7.13	6.28	5.46
Health	2.66	7.16	9.58	9.58	9.81	10.58	10.60	9.65	9.39	9.16
Transportation	14.31	6.40	6.41	5.72	6.45	6.13	6.74	7.54	8.19	9.57
Communications	4.42	3.56	1.77	2.86	3.07	4.49	3.60	3.12	2.80	3.09
Recreation and culture	3.81	11.56	9.16	8.97	5.97	7.31	5.63	3.97	2.42	4.26
Education	2.56	6.39	6.93	7.56	7.82	7.89	9.18	10.37	9.58	9.50
Hotels, cafes and restaurants	7.47	13.23	11.35	10.59	9.95	9.96	8.63	8.31	8.34	8.50
Miscellaneous goods and services	4.73	11.00	11.25	11.87	11.33	12.68	11.84	10.03	9.34	10.92
Source: tuik