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Increase In Turkish Consumption Tax Set To Push Inflation Higher

by Philip Morton, Investors

27 November 2007

Turkish inflation rates for this month are set to rise due to an increase in consumption tax on fuel, tobacco and water, according to a statement by the country's Central Bank earlier this week.

Tobacco and fuel have felt the effects of the higher tax rates since the beginning of November, and it has been estimated that they will push revenue up by 4-5 billion lira yearly.

However, the Central Bank went on to add that:

"The recent run-up in food prices has continued to have an adverse effect on consumer prices, in Turkey as well as the rest of the world. Both processed and unprocessed food inflation maintained its upward trend in October due to drought related supply shortfalls. The year-on-year increase in the prices of food and nonalcoholic beverages reached 14.71 percent. Meanwhile, non-food inflation continued its downward trend and declined to 5 percent."

Turning to cost pressures on inflation, it observed that crude oil prices have been on the rise since August. In addition, agricultural commodity prices have continued to follow an upward trend due to drought-related supply shortfalls and increased demand for agricultural products in bio-fuel production. However, the strong position of the New Turkish Lira has partially offset the adverse effects of rising commodity prices on domestic inflation.

To sum up,the Central Bank stated that energy and food prices continue to pose risks to the inflation outlook. The CBT stated that will not react to first round impacts of these developments. Potential second round effects of rising food and energy prices, however, will be closely monitored.

The Central Bank concluded the report by observing that:

"Finally, it should be emphasized that the support of fiscal policy and structural reforms are critical in achieving price stability. In this respect, the European Union accession process and the implementation of structural reforms envisaged in the economic program, which will ensure the sustainability of productivity gains, remain to be of concern. Particularly, advances in structural reforms that would enhance the quality of fiscal discipline are monitored closely with regard to their implications on macroeconomic and price stability."

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