Inflation covers expectations, limiting central bank's options

The inflation rate increased from 7.24 percent to 7.55 percent in February, the Turkish Statistical Institute (TÜİK) announced on Tuesday. The consumer price index in February increased by 0.71 percent compared to the previous month, which is slightly above the expected 0.69 percent.

Turkey's Medium Term Economic Program projects that the end-of-year inflation will be 6.3 percent in 2015, with the government aiming for inflation to hit 5 percent in the consecutive years of 2016 and 2017.

The country's domestic producer price index also increased by 1.2 percent compared to the previous month.

While inflation data is congruent with February expectations, economists said the Central Bank of the Republic of Turkey (CBRT) would continue to decrease interest rates in March due to the recoveries seen in core inflation indicators.

The reason for the rise in inflation is the drastic increase in the price of unprocessed food because of harsh weather conditions and increasing prices in transportation due to oil prices. On the other hand, discounts in clothing prices hindered further inflation increases. Thus, annual inflation increased from 7.24 percent to 7.55 percent compared to the previous year.

The highest monthly increase was 2.59 percent in food and non-alcoholic beverages. In February 2015, the indices rose by 1.77 percent for transportation, 1.06 percent for hotels, cafes and restaurants, 0.94 percent for communications and 0.82 percent for health.

The highest monthly decrease was observed at 6.58 percent in clothing and footwear. In February 2015, the indices declined for alcoholic beverages and tobacco by 0.44 and for education by 0.08.

The highest annual increase was 13.70 percent in food and non-alcoholic beverages. Hotels, cafes and restaurants increased by 12.66 percent, miscellaneous goods and services by 9.18 percent, health by 8.29 percent and education by 7.96 percent.

İş Invest economist Muammer Kömürcüoğlü said that the highest contribution to monthly inflation in February came from the food sector, with 0.67 points as was expected. "The central bank could point to the continued improvement in core indicators and go for a measured rate cut at the March MPC if global risk appetite and the dollar-lira rate allows," Kömürcüoğlü said.

Garanti Investment Chief Economist Gizem Öztok Altınsaç said that they expected the central bank to continue to decrease interest rates. "We expect a 25 basis points cut in policy interest, which is 7.5 percent, and a 25 basis points cut in corridor interest, which is 7.25 to 10.75 percent. If inflation had risen higher than expected, expecting interest rate cuts to continue could have been delayed. However, this figure shows that expectation for interest rate cuts will continue in March, too."