CBRT: Evasive, unconvincing

TURKEY - In Brief 30 Apr 2019 by Murat Ucer

---

The CBRT released the year's second Inflation Report today. The 2019 year-end CPI-inflation forecast was kept at 14.6% (midpoint of 12.1%-17.1% band), so was the 2020 year-end forecast -- at 8.2% (midpoint of 5.1%-11.3% band). As usual, the Bank sees inflation slowing to the official target of 5% in the medium-term.Regarding the details of the 2019 forecast as such, the CBRT now sees positive contributions from higher food prices (0.7 pps) – now raised to 16% from 13% previously -- and lira-denominated import prices (0.3 pps), but expects these to be offset by negative contributions from lower consumer taxes/administered prices (-0.6 pps), improvements in the underlying inflation trend (-0.3 pps) and a more negative output gap for the year as a whole (-0.1 pps).We are refining our own numbers at the moment, but the Bank’s forecast looks quite a bit on the optimistic side to us. First, the lira has already weakened by some 11%-12% since mid-January, i.e. since around the time of the conclusion of the first Inflation Report, and further weakness is very likely ahead. Second, downward revisions to inflation forecast on the back of a “trend-improvement” and a more negative output gap should be taken skeptically in our view, given that inflation dynamics have shown much stickiness so far. Finally, some (upward) adjustments in administrative prices down the road seem very likely to us, given the poor state of public finances – and that the budget deficit target is likely to be missed by a large margin, unless some corrective action like through higher taxes, is taken at some point.Perhaps more importantly, the CBRT/Governor Cetinkaya seemed rather unconvincing and elusive on...