Sharp rises in food and drinks prices pushed Turkish inflation to a higher-than-expected 1.64 percent in December, official data showed on Tuesday, triggering a slide in the lira to a record low against the dollar. Growing worries over inflation have exacerbated worsening investor sentiment due to security concerns after a series of bomb and gun attacks, a slowdown in the economy and political uncertainty generated by plans for an executive presidency.

A New Year's Day mass shooting at an Istanbul night-club, which killed 39 people and was claimed by Islamic State, highlighted the security fears. The month-on-month rise in the consumer price index (CPI) exceeded a Reuters poll forecast of a 0.93 percent rise. Year-on-year CPI rose 8.53 percent, the Turkish Statistics Institute said, exceeding a central bank forecast of 7.5 percent and sharply above its official target of 5 percent.

J.P. Morgan economist Yarkin Cebeci said this credibility loss along with political uncertainties should increase pressure on the central bank, which already sounds concerned by recent lira weakness, financial stability and consumer sentiment. "However, the CBRT policy response is constrained by the weakening in economic activity and the demands coming from political players for lower interest rates," he said. The lira weakened more than 1.5 percent to a record low of 3.6040 against the dollar in afternoon trade before firming back to 3.5875 by 1323 GMT.

Copyright Reuters, 2017