​Unfazed By Politics, Ratings, the CBRT Intends Further Easing

TURKEY - In Brief 26 Jul 2016 by Murat Ucer

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The CBRT Governor Murat Cetinkaya presented the third (his second) Inflation Report of the year today. The yearend inflation forecasts for both 2016 and 2017 have been kept at 7.5% and 6% (mid-points), respectively, with some changes in composition, as we had surmised on Sunday. For 2016, in particular, the Bank hopes that a lower food inflation assumption (8% now versus 9% previously) and weaker demand conditions will fully offset the adverse effects from: 1) a higher oil price (by about 10% now at $44, p/b) assumption; 2) a weaker lira and hence, a higher (TL-based) import price assumption; and 3) sharp jumps in tobacco and food prices that are estimated to have significant effects on July inflation. The Bank’s calculus looks a bit too optimistic, however. There is no reason why, for instance, the July jump in CPI inflation -- on the back of food and tobacco prices -- should necessarily reverse in the remainder of the year (leaving us with a lower food assumption than before at the end) or a weaker economy should tame import prices significantly enough to contain the pass-through from a weaker lira, which, as a matter of fact, is quite likely to continue. Regarding the future course of monetary policy, again not so surprisingly, Governor Cetinkaya has had a “business as usual” attitude. Seemingly unfazed by the recent political shock or the rating agency decisions, particularly that of Moody’s (which, incidentally, Governor doesn’t seem to think will lead to a downgrade), Mr. Cetinkaya and his team seem determined to continue with the “simplification” journey – which is a euphemism for easing, as we’ve noted before. As long as the market remains complacent, that is, ...