Turkish inflation rose less than expected in October, official data showed on Friday, triggering a strengthening of the lira currency in what economists saw as a positive development.
But they also noted that inflation remains well above an official year-end target following turmoil in May-June in emerging markets and some said they expected the central bank to raise interest rates further before cutting them.
Turkey's consumer price index (CPI) rose 1.27 percent month-on-month in October for an annual rise of 9.98 percent, the Turkish Statistics Institute (TUIK) said on Friday. The producer price index (PPI) in October was up 0.45 percent month-on-month and up 10.94 percent year-on-year.
"This is very positive as it confirms that Turkish inflation is on a solid downward trend and should terminate the year in single digits," said Murat Toprak, emerging markets strategist at Societe Generale in London. "This is pretty reassuring for bond markets and these should outperform," he added.
Turkish bonds and the lira currency staged a late rally after the data were released, though shares had already closed weaker in anticipation of higher inflation figures. In a Reuters poll, 19 analysts had given a median forecast for CPI consumer inflation to rise 1.50 percent month-on-month in October after September's 1.29 percent rise. The median prediction for the producer price index was 1.00 percent.
Analysts attributed the slower rise to high interest rates, a firmer lira and weaker energy prices in October. Investors were heavily focused on Friday's data as rising prices have put an IMF-backed target of 5 percent year-end inflation out of reach.
Inflation had been expected to be higher in October than a month earlier due to higher spending in the Muslim fasting month of Ramazan and the following Eid holiday. Annual consumer price inflation was 10.55 percent in September.
Analysts urged caution on the prospects for interest rates. "Even though this is good news, one should be careful in becoming too optimistic on the outlook for Turkish inflation," said Lars Christensen of Danske Research.
"Furthermore, this does not mean the Turkish central bank is about to cut rates - in fact we continue to see the risk on rates on the upside rather than on the downside," he said, adding that future rates moves were closely tied to the lira.
Economists say the lira, about nine percent weaker than in late April before the emerging market turmoil, could come under fresh pressure due to political concerns linked to 2007 elections and Turkey's troubled ties with the European Union.
"We are still biased to 75 basis points more rate hikes in this cycle, given we still see 12 months ahead CPI well above the 4 percent target," said Simon Quijano-Evans of CAIB.
The government has maintained its commitment to a target of 4 percent inflation at the end of next year. The Turkish central bank raised its overnight interest rates between 425 and 625 basis points this year in order to contain rising inflation amid financial turbulence in May and June. Economists expect inflation will start easing early next year due to a fall in energy prices and higher borrowing rates.