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CBRT Inflation Report: Pause in the easing cycle and inflation forecast path

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At the 1st Inflation Report Information Meeting of the year, which will be held tomorrow, we will evaluate the forecast path of the CBRT for inflation, the route it will adopt after not making any rate changes in the last MPC, and its approach to inflation. We think that the Central Bank will make a serious revision to the 2022 forecasts it put forward in its latest Inflation Report in October, in terms of the current situation created by the price developments in between and the objectives set out in the new economy perspective.

 

In its latest Inflation Report in October, the Central Bank announced its 2022 year-end CPI forecast as 11.8%. We expect inflation to move around 50% with the acceleration it will catch in the first months of the year and to show a partial regression due to the base effect in the last months of the year, after remaining high for a significant part of the year. Therefore, the range in the previous forecast period is no longer valid today. In addition, the developments in the exchange rate and the extremely low real interest rate, which is no longer given importance by the economy management, reveals an uncertainty regarding the volatility of the lira. We think that this situation also poses a risk in terms of inflationary pressures and poses an additional risk even though the current inflation path is high enough. The recent increase in oil prices and the price increases to be applied in the axis of exchange rate + global prices and the cost increases that will occur in this way may trigger an increase pressure on both producer and consumer prices. We will see how close the revision of the Central Bank’s forecast table will come to market-based expectations. According to the central bank’s January market participants’ survey, the inflation expectation for the next 12 months rose from 21.39% to 25.37%.

 

The rise in prices was further fueled by the loss in the lira, as the central bank cut the benchmark rate by 500 basis points in four consecutive meetings before breaking the easing cycle. The lira stabilized somewhat after the government took emergency measures in December with currency-protected deposits to compensate lira savers for significant currency drops. In monetary policy, we do not see a response to an rate hike at this stage to high inflation and tightening global financial conditions. Nevertheless, we think that TRY investment incentives and currency protected deposit products, which are similar to side policy instruments, can be brought to the fore. We are at a moderate point in terms of the stability of the TRY and naturally the effects of such products and actions on inflation, and we think that the main risk factors are not eliminated. The level and direction in which inflation will continue will keep the real interest rates of the lira in the deep negative zone. We think that the volatility in TRY will continue as long as generally accepted economic policies are returned and a reaction mechanism is not established around the main policy.

 

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In the general policy motto, the government and economy management want to reduce borrowing costs. Therefore, we think that current conditions still do not include a policy tightening, but may lead to pauses in monetary policy for a while. Against this; When we compare the central bank guidance and the statements in the latest MPC, we see that one end is open. In the last MPC, the statement “A comprehensive policy framework review process that gives priority to the Turkish lira continues” came to the fore. If the policy rate remains stable, or rather not lowered for a while, it may exceed the 1Q22 period, especially depending on inflation and lira developments. We will draw conclusions within the scope of basic policy within the framework of Mr. Kavcıoğlu’s answers to economist questions.

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