April Inflation Report Highlights

TURKEY - In Brief 30 Apr 2014 by Murat Ucer

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Here are a few highlights from today’s Inflation Report presentation by Governor Basci: *Yearend inflation estimate is now up by a full percentage point to 7.6% (midpoint of the usual 70% probability band). The revision is a bit on the high side, but the revision itself is not surprising (see our last Tracker). The 7.6% figure as such is a reasonable working assumption, or at least close to ours (around 8%). *As usual, the Bank forecasts that inflation will be 5% next year. But reasons as to why this should be the case are entirely unclear, especially in light of Governor Basci acknowledging some worsening in pricing behavior (contributing, in fact, some 0.3 pp to the inflation revision). This deterioration is not surprising, either, given that, among other reasons, monetary policy has no proper nominal anchor (with inflation being just one of the many objectives) and the exchange rate pass-through is probably on the rise again. *On the rate outlook, we get the gist of what the Governor has said as a conditional signal for a few moderate rate cuts in the coming months. That is, the Bank has a very clear easing bias, but it will first test the waters before executing the first cut (of the weekly repo rate of 10%). For instance, if the Bank sees the lira behaving while money market rates hold up comfortably at 10%, it could take the first step. *In the interim, liquidity will remain tight, the Governor said, in the 10%-11.5% band. That the Governor noted 11.5% instead of 12% was interesting, which made us think that as early as in May, a somewhat symbolic 50 bps cut of the O/N lending rate may be executed. (But the reduction of the weekly rate would have to wait along th...