Turkey plans to avoid inflation jump driven by tobacco tax increase

According to daily newspaper Dunya, the government is mulling over a plan to change the taxation schedule on tobacco products in such a way that it will soften the impact on inflation. Recall that the government raised the proportional special consumption tax on tobacco products back in October 2011, yet part of the tax hike was then delayed to January 2013 in order to avoid a big jump in inflation. Accordingly, if the government does not decide otherwise, the proportional special consumption tax on tobacco will be hiked to 69% from 65%.
If reflected entirely to the end users, this tax adjustment can result in more than 20% in price hikes which would add more than 1ppt to the headline CPI. This is incorporated into our inflation forecast for 2013. If the government abolishes this tax hike and/or replaces it with a lump-sum tax adjustment, then we may revise our 6.4% CPI forecast for 2013 downwards. This would be favourable for the inflation outlook and a convergence towards the CBT's own 2013 year end estimate of 5.3% would be possible. This would also be supportive for pushing yields even lower. We expect the two-year benchmark bond yield to decline to 6% soon.