Inflation Report: the CBRT is playing the same game

TURKEY - In Brief 29 Jul 2021 by Murat Ucer

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The economics author is traveling today and will be boarding his flight shortly, so what we have below is first impressions from today’s Inflation Report. If need be, we will follow up with a more detailed analysis.First off, as we have expected, the CBRT revised the yearend forecast upward – because 12.2% is just too unrealistic at this point- but relatively modestly to 14.1%. The revision was mainly driven by higher import prices and food inflation, but this is not so important. Also as expected, the path has been revised up, with inflation now hovering around (a mid-point) of 18% in the near-term. Although the picture below is in Turkish because the English version was not available at this writing, this can be seen by simply eyeballing the shaded areas in the two pictures below, with the old forecast (April) on the left-hand side and the new forecast path on the right-hand side.The problem is that there is no new information here that we did not have in April, but the Bank does this, i.e., sticks to a more optimistic view, simply to leave Q3/Q4 rate cut on the table. This approach is continuing today. The forecast is still optimistic under the circumstances, but the Bank is mainly because the Bank likes to keep the rate cut option alive and well. We continue to think though, that despite this intention or bias, the Bank will not be able to cut rates this year – or any time soon – but a policy mistake cannot be ruled out.We think the Bank’s forecast is optimistic because, among other reasons, economic activity is still relatively strong, cost-push pressures, specifically the increase in import prices in TL, are continuing/will likely continue, expectations/pricing b...