Official data released on Monday showed that Turkey's annual consumer price inflation dropped to 39.05% in February, lower than expected by analysts in a Reuters poll, and the lowest level in nearly two years, ahead of a likely interest rate cut this week.
Annual inflation was 42.1% in January.
According to Turkey's Statistics Institute, monthly inflation stood at 2.27% in February, also lower than expectations. In January, monthly inflation was 5.03% and annual inflation was 42.12%.
A Reuters poll had expected monthly inflation to decrease to 2.85% in February, driven by regulatory changes that reduced the payments required from patients in public hospitals, with expectations for the annual rate to drop to 39.90%.
The data also showed that the producer price index rose by 2.12% month-on-month in February and increased by 25.21% year-on-year.
The Turkish lira recovered its losses against the dollar after the data and stabilized at 36.46.
Medical Test Prices
Bloomberg quoted economist Haluk Boromcikci, based in Istanbul, saying that the partial reversal of the decision on regulated increases in medical test prices was a major contributor to the lower-than-expected inflation. Price hikes for these co-payments had been a key factor in rising inflation in January.
These numbers are likely to strengthen expectations for another interest rate cut by the central bank on Thursday. Almost all analysts surveyed by Bloomberg expect policymakers to reduce the main borrowing cost to 42.5% from the current 45%.
Boromcikci added that the challenge is ensuring that inflation expectations do not rise – a risk highlighted by policymakers – amid the cuts.
Expectations for household prices over the next 12 months slightly increased in February.
Price groups related to rent and education remain an issue, as both saw the largest monthly increases in February. The central bank had previously stated that inflation in such services remains outside the scope of monetary policy's influence.
Monetary policymakers raised their inflation forecast for the end of the year to 24% from 21% last month. Governor Fatih Karahan warned that the cuts are "not automatic," and policymakers may slow the pace or suspend them if necessary.
