(MENAFN- Gulf Times) Turkey's annual inflation overshot its 5% target for a fifth year running in 2015, data showed yesterday, piling pressure on a central bank hamstrung by official opposition to interest rate hikes.
Deputy Prime Minister Mehmet Simsek said battling inflation would be this year's main economic challenge. But a sharp rise in the minimum wage, hikes in electricity prices and alcohol and tobacco taxes, and President Tayyip Erdogan's preference for lower rates to boost growth will make that a tough job.
Consumer prices rose 8.81% year-on-year in December, above the 8.52% rise forecast in a Reuters poll, according to the Turkish Statistics Institute data.
That was above both the central bank's 5% inflation target, set with the government, and its revised-up forecast of 7.9% for the end of 2015.
Economists said falls in the lira of around 20% against the dollar and a rise of more than 10% in food prices were the main causes.
"Structural problems in the food sector still need to be addressed and Turkey needs a stable lira to bring down annual CPI inflation," BGC chief economist Ozgur Altug said in a note, adding that tighter monetary policy was needed.
"Whether the current (central bank) governor or the new governor will be able to deliver it is yet to be seen."
Central Bank governor Erdem Basci's five-year term ends in April. In a surprise move, Basci left interest rates unchanged in December for a tenth straight month despite high inflation, fuelling questions about the bank's independence.
It kept its main one-week repo rate at 7.5% while its average cost of funding stood at 8.81%, both below core inflation of 9.51%.
Turkey introduced a 30% increase in the minimum wage on January 1, a move promised by the ruling AK Party in the run-up to a November 1 election at which it won back its parliamentary majority.
In an interview on broadcaster NTV, Simsek said the impact of the wage hike - which he said amounted to a 20% rise in real terms - could be between 1.1%-2.2% on inflation.
JPMorgan economist Yarkin Cebeci forecast annual inflation rising to 9.5% in the next three months on the back of the minimum wage hike and tax increases. He raised his end-2016 inflation forecast to 8.1%.
"The central bank needs to act more prudently. Given that the term of Basci ends in April, we see a slim chance that the central bank acts with vigour," he said in a note.
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