Inflation forecast raised, but (unsurprisingly) not enough

TURKEY - In Brief 28 Jul 2022 by Murat Ucer

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The CBRT released the third Inflation Report of the year today. The Bank raised its yearend inflation forecast for 2022 by 17.6 pps to 60.4% (mid-point of 56.9%-63.9%) from 42.8% in the April Report, which is still visibly below consensus (e.g., CBRT Survey of just under 70% and our somewhat higher forecast). The 2023 forecast was also raised by 6.3 pps to 19.2%, but that number is particularly unrealistic in the absence of a proper monetary policy stance and a comprehensive program. The forecast revision is driven by several factors, but chiefly by higher import prices in local currency, food inflation and a higher trend inflation (see Slide 31 at link here for the exact figures and estimates). Parenthetically, food inflation is now forecasted to end 2022 at over 71%, up form 49% previously. Going forward, the Bank sees inflation rising further through October/November, before sharply collapsing to the above-noted 60.4% (see Slide 30 at the above hyperlink). The press conference, frankly and bluntly speaking, was quite surreal even by the standards of the CBRT. Governor Kavcioglu made various statements that were either too bizarre to be meaningful (e.g., “the least depreciating currency in the month is the TL when the last 10 days are excluded”), or outright incorrect/incomplete (e.g., “the effect of the exchange rate on inflation is less than in the past”, “when the global commodity prices start to normalize, our economy will have reached the capacity to run a current account surplus”, “reserves are around the same level of last year”), or mechanically unachievable in a (semi-) market economy (e.g., “continue to take steps to ensure that all interest rates converge ...