The Central Bank revised its inflation forecasts upwards as expected due to the intensifying upward price pressures, especially in the global commodity prices and weak TRY. At the meeting where Governor Mr. Şahap Kavcıoğlu presented the 3rd Inflation Report of the year (his second), the year-end forecast of 12.2% in the April reporting period was raised to 14.1%, regarding the increase in consumer prices. We see that the Central Bank’s forecasts have been increased to take into account the price developments that are on the forecast path since the previous reporting period, but are still below the level predicted in the Market Participants Survey (current median 15.6% for the end of the year). Current policy direction of the Central Bank; It includes the commitment to maintain interest rates in positive territory when adjusted for actual and expected inflation, and to maintain a tight policy until the 5% inflation target is reached.
Some other highlights from the CBRT Inflation Report meeting;
· Inflation is expected to decline to 7.8% by the end of 2022. The 2022 forecast in the April Inflation Report was at 7.5%.
· The food inflation forecast at the end of 2021 was increased to 15% from the previous 13%.
· 2021 average oil price is assumed to be 69.6 USD per barrel.
Forecasts for oil and food prices seem to have been revised in line with the inflation forecast path. However, currently headline inflation is 17.5% and food inflation is 20%. Therefore, the forecasts are still optimistic in terms of the price increase path, which is still high. While the upward trend in agricultural commodity prices is preserved, the increase continues in the general commodity group due to supply bottlenecks, procurement problems and delivery delays. With the weak TRY effect added to this, increasing pressure continues on the PPI first and on the CPI through the delayed transition mechanism. On the managed and directed prices side, the effect of new tax adjustments and energy hikes has pushed the price balance point upwards, and this seems to be the main driver of the July inflation, which we expect at 18.5%. Considering the contribution of the diffusion effect to price rigidity, it is understood that we will be faced with an inflation that will maintain a high tone until the base effect kicks in to a certain extent in 4Q21.
In this process, with the opening after measures for outbreak of pandemics, the price transition mechanism took place rapidly and had an impact on the inflation, which showed a jump in June. Although the demand effect maintains a certain level, it may fade over time within the framework of tight monetary policy measures and the contribution to inflation may decrease. However, the weight of the cost channel will increase even more in inflation, which is currently rising from the double channel due to demand and cost, and it will continue to exert upward pressure on inflation. This brings the most fundamental question to be asked: Is it possible for inflation to exceed the 19% policy rate? Will the Central Bank raise interest rates in such a position?
If we take as a basis the statements made by Mr. Kavcıoğlu without making direct reference to the rate hike or cut; A significant decrease in inflation is expected in 4Q21. It will be heavily, even if it does happen, in a way that takes advantage of the base effect. However, we do not expect the general trends of pricing to change under these conditions. Inflation trends in the world are not expected to break through in the near future. The interest rate application above inflation reveals the necessity of increasing interest rates in a scenario where it rises above 19%. However, it can be understood that the Central Bank did not include this in the fundamental scenario analysis, especially within the framework of the inflation assumptions in 4Q21. It is assumed that the effect of the opening after quarantines and the revived tourism season on foreign exchange income, its positive reflection on the current account deficit, and even the optimistic expectations on the exchange rate of a periodic current account surplus will contribute to the decrease in inflation. On the other hand, it is seen that the CBRT did not take any action like the interest rate hikes made by some other emerging country Central banks in the process of Fed will go through reducing their asset purchases.
As it will be remembered; President Mr. Recep Tayyip Erdoğan, in a TV program he participated in a short time ago, made the assessment that interest rates could decrease in July or August. In that period, we have left the month of July behind. In particular, TRY, which has depreciated by more than 15% since the end of March, and the rising prices in this way, caused the inflation pressure to be felt higher and under Mr. Kavcıoğlu, the Central Bank continued to keep the policy rate at 19%. The expectation that inflation will reach 18.5% in July and that it maintains its upward trend has narrowed the field in terms of inflation-adjusted interest rates, and the issue of real interest rates is very important as competition will arise with similar countries during the Fed tapering period. The criterion that TRY offers a strong positive return guarantee is also at the decisive point for dollarization. Therefore, a TRY that does not offer strong enough returns will not be in an effective position to break the dollarization. Even the current levels of inflation leave little room for interest rate cuts, and the risks involved have the potential to further reduce the already narrow space. Under these conditions, it seems unlikely that the issue of interest rate cuts can be addressed.
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Hibya Haber Ajansı
Kaynak: Hibya Haber Ajansı