Bloomberg News

Tobacco-Fueled Price Gains Cloud Future Inflation: Turkey Credit

February 04, 2013

Traders are less sanguine than economists that inflation in Turkey will slow after rising at the fastest pace in three months during January.

Yields on two-year benchmark lira notes climbed from a six- week low yesterday after the release of the inflation report, paring this year’s biggest decline among major emerging markets. One-year interest-rate swaps, which indicate investor expectations of borrowing costs, jumped the most since October.

Consumer price growth accelerated to 7.31 percent in January, surpassing the 6.77 percent median estimate of 10 analysts in a Bloomberg survey. Policy makers cut interest rates last month even as they warned of a potential increase in January because of higher tobacco prices. The central bank missed its inflation targets the past two years, with the rate almost twice the goal in 2011.

“People are questioning whether the central bank will meet its inflation target and the majority don’t believe it will be successful,” Selim Gulkan, a fixed-income trader at Turk Ekonomi Bankasi AS (TEBNK) in Istanbul, said in e-mailed comments yesterday. “Nevertheless, the fall in core inflation measures is helping retain optimism.”

Yields on two-year local currency securities climbed four basis points to 5.84 percent yesterday, trimming this year’s drop to 34 basis points, the most among 17 emerging markets tracked by Bloomberg. One-year interest-rate swaps increased 31 basis points, the most since Oct. 19, to 6.57 percent.

The one-year breakeven rate, a gauge of investor inflation expectations that shows the yield gap between fixed-rate bonds and those indexed to consumer prices, increased to 6.99 percent yesterday from 639, according to data compiled by Bloomberg.

Core Inflation

The annualized inflation rate climbed to the highest level since October as tobacco and alcoholic beverage prices jumped 14.3 percent from the previous month, the biggest increase among 10 industry groups, the Ankara-based Statistics Institute said yesterday. Price growth was 6.16 percent in December.

The core rate excluding volatile items including food, drinks, tobacco, energy and gold slowed to 5.72 percent from 5.81 percent the previous month and compared with a median estimate of 5.68 percent in a Bloomberg survey.

Inflation was 6.2 percent at the end of last year and 10.4 percent in December 2011, compared with central bank targets of 5 percent and 5.5 percent, respectively, according to data on the bank’s website. Governor Erdem Basci reiterated at year-end inflation goal of 5.3 percent on Jan. 29.

Price growth will probably slow to 6.3 percent in the last three months of 2013, down from a peak of 6.8 percent in the second quarter, according to the median estimate of 11 economists surveyed by Bloomberg.

Temporary Jump

“We expect the rise in food prices to be temporary,” Yarkin Cebeci, an economist at JPMorgan Chase & Co., said in an e-mailed note yesterday. “As the underlying inflationary forces remain weak, we do not expect this high print to have any significant impact on monetary policy decisions.”

Five-year credit-default swaps on Turkey were little changed at 137 basis points yesterday. That compared with 147 for Russia, 94 for Poland and 176 for South Africa. (WHL) Higher prices show worsening perceptions of a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.

The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries increased four basis points, or 0.04 percentage point, to 188, according to JPMorgan (JPM:US)’s EMBI Global Index. The premium compared with the emerging-market average of 272.

Capital Inflows

The central bank cut its overnight lending and borrowing rates by 25 basis points on Jan. 22, citing accelerated capital inflows that may widen the current-account deficit. The next monetary policy meeting is scheduled for Feb. 19.

The lira lost 0.5 percent against the dollar to 1.7577 at 6:35 p.m. in Istanbul yesterday, paring this year’s gain to 1.4 percent. The currency appreciated 6 percent against the dollar last year.

“We are not yet optimistic on the inflation trend because the room for the currency appreciation is limited,” Bora Tamer Yilmaz, a director of external relations at Istanbul-based Halk Securities, wrote in a note yesterday. Bond yields “may show more marked increases if inflation stays above 7 percent in February,” he said.

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at

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