Turkey's annual inflation falls due to drop in food prices

The annual rate of inflation in Turkey fell to 7.46 percent last month due to a sharp drop in food prices, according to official data released on Monday.

February's rate had stood at 8.78 percent, the Turkish Statistical Institute said.

Monthly inflation dropped 0.04 percent in March from the previous month, the report said.

The health sector saw the highest monthly increase for March, with a 1.84 percent rise while the highest annual increase was the 12.79 percent recorded for the price of alcohol and tobacco products.

Deputy Prime Minister Mehmet Simsek, who has responsibility for the economy, described the fall in the annual rate as "positive" but warned that core inflation, which includes energy prices, still stood at around 9.5 percent.

Experts said the decrease would give Turkey's Central Bank more leeway in making cuts to interest rates.

Atilim Murat, an associate professor at TOBB University of Economics and Technology said low energy prices continued to affect inflation in Turkey favorably. "Energy prices will lower again and this will help Turkey to get inflation, which is the country's biggest problem, lower," he said.

"In the coming months, it seems that inflation will get lower and lower. Next month, we will see lower inflation numbers because of base effects." This would lead to further interest rate cuts, he added.

ALB Securities analyst Enver Erkan identified food prices and foreign currency levels as two crucial factors in the Turkish economy.

"But we see that core inflation remains way too high, compared to the headline because of the depreciation of Turkish lira compared to last year," he said. "So it means that other factors continue to affect inflation upwards. With the sharp decline in headline inflation, the Turkish Central Bank may be encouraged to cut interest rates but the high core inflation level may limit the interest rate cut.

"The main risk is the additional depreciation of lira but if food prices continue to get better and currency levels stay stable, inflation expectations might be revised downwards to 7.5 to 8 [percent] levels."

Plummeting oil prices have also played a role in bringing down inflation, reaching less than $30 a barrel earlier this year compared to $115 in June 2014.

The Central Bank is likely to maintain tight control on interest rates while core inflation remains high. The one-week repo rate will be kept at 7.5 percent while the borrowing rate will remain at 7.25 percent. The overnight lending rate will be cut from 10.75 to 10.5 percent.

The bank forecasts a year-end inflation rate of 7.5 percent.