CBRT Inflation Report: Inflation forecasts expected to increase once again, while no rate hikes

At the 4th Inflation Report Meeting of the year to be held tomorrow, We will be evaluating the Governor of the CBRT, Mr. Şahap Kavcıoğlu's estimation path for inflation from the perspective of the latest variables and monetary policy. Pricing behavior that continued to deteriorate after the 2022 estimations of 60.4% in the last Inflation Report of the Central Bank in July and the increasing uncertainty band require an upward revision of the current expectation in this reporting period. While annual inflation reached 83.5% as of September, the expected decline at the end of the year was largely attributed to the base effect. However, it is worth noting that the expectations of market participants are one notch higher than the official expectations.

After inflation probably peaked at around 85% in September or October, we would expect December inflation to be at more moderate levels, with the base effect operating, as the high periodic realizations in the conjugate period of last year will be out of the calculation. On the other hand, inflation, which we expect to be at the level of 73.5% at the end of the year, is still very high and non-standard both in our historical series and in comparison with other countries. It is difficult to say that this inflation occurred in conjugate coefficients with the world, because firstly, inflation had become a problem before the start of the war with Russia and Ukraine. Inflation, which was 19.6% in September 2021, the first time the CBRT cut rates, rose to 36.1% at the end of 2021 and to 54.4% in February 2022 before the start of the war. Therefore, the commodity price problems that arose with the war did not create the situation from the beginning, but worsened the conditions that had begun to deteriorate.

After the CBRT ended the long-running series of keeping interest rates constant and started new series of rate cuts in August 2022, September 2022 inflation reached 83.5%, the highest level in 24 years. The pressure from the PPI continues intensely, and the cost pressures from exchange rates and commodity prices keep upside risks in terms of CPI. In this conjuncture, we will overcome the main pricing disorders on the basis of annual rates, not periodic rates. Which means that; price increases last year were so high that it is difficult to surpass these periodic increases next year. This will cause annual inflation changes to appear lower. While base effects are helping price increases fall from a 24-year high, we expect to be above official inflation expectations for next year as well.

The course of the CBRT Inflation Report forecast updates and the year-end inflation rate comparison. Source: CBRT, TURKSTAT, Tera Yatirim

There is a wide range of uncertainty for the lira about the unorthodox monetary policy of the central bank and how economic policies will continue after the election. Since the value of the lira cannot be revealed, all kinds of risks may arise on inflation. We must also take into account that an expansionary fiscal policy will be implemented. It is not difficult to foresee that the prices will continue to increase, given that incentives to support the electoral economy and growth will increase the financial burden due to financing, and if we consider both the cost to the budget through the main expenditures + financing burden, as well as the effects on revaluations and indirect taxes. The combination of loose monetary policy and pre-election fiscal packages will keep price increases high. We think that this will continue to keep the temperature of inflation high. By the end of 2023, we will probably see inflation in the 30-40% band (Tera 2023 forecast: 32.3%). Even in this state, we can expect the upside risks of inflation, which will be more than 6 times the medium-term target of the Central Bank, to be one step ahead and shift the forecast path upwards. Periodic price increases may accelerate within the framework of both lira developments stemming from domestic economic policies and product/raw material/input prices stemming from the global geopolitical/inflationary environment.

We will probably see the Central bank rise to the 65% band or slightly higher than the 60.4% forecast. Inflation forecasts in the MTP published by the government in September and in the 2023 Presidential Annual Program published yesterday are 65% for 2022. Considering that the CBRT will not deviate much from these rates, it can be predicted that they will remain below our 2022 forecast of 73.5%. As the effects of factors such as developments in oil and food prices, the Fed's rate hikes, and possible continued increases in the exchange rate within the framework of the looseness of the local monetary policy, on producers and consumers will negatively contribute to the inflationary environment, the risks to new forecasts are also upwards. Even if inflation expectations are revised upwards, we will not be expecting a tightening in monetary policy for the near term.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı