Inflation Report: Rate cuts to continue

TURKEY - In Brief 28 Oct 2021 by Murat Ucer

---

The CBRT released the final Inflation Report of the year today (presentation here; overview chapter here). The year-end inflation forecasts for 2021 and 2022 were raised further to 18.4% and 11.8% (both midpoints), respectively, from 16.2% and 9.8%, in the September MTP. This year’s inflation forecast is now some 4.3 pps higher than that of the July report (14.1%), which the Bank attributes mainly to higher food inflation (+2.1 pps) and a further rise in TL-dominated import prices (+1.5 pps), while administered prices and the upward revision to output gap projections contribute another 0.3 pp and 0.4 pp, respectively. Parenthetically, the year-end food inflation now stands at 23.4%, up from 15% previously. These revisions are nothing to quarrel with, but it is worth stressing that there is not much here that was not known or predictable at the time of the July report. This confirms our long-held view that the Bank – no matter how unrealistic or sanguine these forecasts may be -- keeps them intentionally low, with the sole objective of executing as many rate cuts as possible. We say intentionally, because it is hard to imagine a whole research department of young PhDs not knowing how to run some simple time series regressions and come up with more reasonable forecasts, as this old man did with some help from the younger generation, for instance, even before the release of the July Inflation Report (Inflation: Is 20%, the New 10%?, July 9, 2021).But we now have something slightly more important happening. Judging from Governor Kavcioglu’s remarks today (combined with a few other made earlier), the CBRT has taken it all to a different level now by embracing a whole differ...