CBRT: Prepare for volatility in inflation

TURKEY - In Brief 31 Oct 2018 by Murat Ucer

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The CBRT has released this year's final Inflation Report today.2018 yearend inflation forecast was revised sharply up to 23.5% (midpoint of a range between 21.9% and 25.1%) from 13.4% previously, which is close to 24.2% of the latest CBRT expectation survey (October results), but higher than New Economy Program forecast of 20.8% (which, because of the timing, had not factored in the August volatility fully into inflation projections). The CBRT also raised the 2019 yearend forecast to 15.2% (midpoint of a range between 12.3% and 18.1%) from 9.3%. According to the Bank, inflation will slow to 9.3% in 2020, and to the official target of 5% in the medium term.As for the reasons for revisions, some 4.1 percentage points (pps) of the 10.1 pps upward revision to 2018 inflation forecast comes from the increase in TL-denominated import prices, while upward revision to the food price forecast and inflation trend contribute 3.8 and 2.5 pps, respectively. (Parenthetically, food prices should not be thought fully isolated from the passthrough effect, in our view, while the latter clearly captures inertia/deterioration in pricing behavior.) Output gap as such is forecasted to shave off 0.3 pps from 2018 inflation. For 2019, much of the 5.9 pps upward revision comes from the increase in TL-denominated import prices (3 pps) and the deterioration in the main inflation trend (3.6) also, while the disinflationary influence from a negative output gap is naturally much stronger in 2019, at 1.4 pps.In his presentation, Governor Murat Cetinkaya said there would be additional tightening if need be, but did not provide any specifics regarding the inflation path ahead (including the impact of t...