Inflation Report: Betting on a self-fulfilling prophecy

TURKEY - In Brief 30 Jan 2020 by Murat Ucer

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The CBRT has released this year's first Inflation Report, according to which the Bank kept 2020 and 2021 yearend inflation forecasts unchanged at 8.2% (midpoint of 6.2%-10.2% band) and at 5.4% (midpoint of 3.0%-7.8% band), respectively. Similarly, the Bank tweaked the assumptions behind the forecasts either very little or not at all. For instance, the oil price assumption is slightly higher now, and the (negative) output gap assumption is slightly lower, while food price inflation is left intact at 11% and 7% for this and next years, respectively, with upward revisions cancelling out with the downward revisions. Downward revisions also included some 0.2 percentage point drop, thanks to an improvement in underlying inflation trends. (For details, see here and here.)So, let’s cut to the chase: “Managed float to continue through state bank interventions, as the policy rate is driven down to single digits” is the way we read the gist of Governor Uysal’s messages today. The Governor gave an implicit endorsement or acknowledgement of sorts on the former by saying that he expects state banks “to continue being active in the currency market”. As regards the single digit policy rate, it is now quite clear how the Bank/Governor Uysal calculate the “reasonable real return”, which seems based on the Bank’s own forecast, rather than actual inflation and/or inflation expectations.Going with this logic, if we are all to believe in the 8.2% forecast for this and 5.4% forecast for next years, the policy rate, in theory, could be as low as, say, 7%-8% in 6-12 months’ time. We continue to believe this is very much the intention at the moment, barring a major currency event. Parenthetical...