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Cablegate: Rising Inflation Challenges the Central Bank

VZCZCXRO3819
RR RUEHDA
DE RUEHAK #2895 3390558
ZNR UUUUU ZZH
R 050558Z DEC 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 4547
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 3594
RUEHDA/AMCONSUL ADANA 2501
RUEHBS/USEU BRUSSELS

UNCLAS ANKARA 002895

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - JROSE

SENSITIVE
SIPDIS

REF: ANKARA 685

E.O. 12958: N/A
TAGS: EFIN TU
SUBJECT: Rising Inflation Challenges the Central Bank


1. (SBU) Summary: Turkey's headline consumer inflation was 1.95
percent in November, considerably higher than the 1.58 percent
consensus estimate, and this result surpassed even the most
pessimistic economic forecasts. Core indicators were not
encouraging and non-food inflation picked up sharply. Oil price
increases hit hard in Turkey, which imports an annual average of $30
billion. The Central Bank (CBRT) inflation target is four percent
and year-on-year November inflation was 8.40 percent. If the CBRT
yields to political pressure to cut rates at the December 13
Monetary Policy Committee (MPC) meeting, inflation could continue to
spike and the CBRT's credibility could be questioned. End summary.
2. (U) Turkey's November consumer price index (CPI) increased 1.95
percent; while the producer price index (PPI) increased 0.89
percent. Year-on-year November inflation reached 8.40 percent for
CPI and 5.65 percent for PPI. Year-to-date inflation was 8.15
percent for CPI and 5.78 percent for PPI. The GOT's CPI target for
2007 is four percent.
3. (U) Overall inflation news was negative, however, in a December 4
statement the CBRT claimed the medium-term inflation outlook was
still on track despite short-term variations.

4. (SBU) Comment: According to market participants and the CBRT,
the main short-term inflation risk is the government's upcoming
decision regarding electricity and natural gas prices. Despite
inflation pressures, many investment banks believe the MPC might
continue to cut the main policy rate by 25-50 basis points on
December 13. The Bank's short-term lending rate is now 16.66
percent. CBRT has been receiving pressure from politicians since
the beginning of the year to cut rates to stimulate economic growth.
CBRT should balance these concerns against inflation pressures and
take into account global economic conditions before making its rate
decision. End Comment.
Wilson

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