Inflation Report: The CBRT reiterates its intention to stay tight

TURKEY - In Brief 30 Jan 2019 by Murat Ucer

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The CBRT released this year's first Inflation Report today. The 2019 year-end inflation forecast, as we had expected, was revised down by 0.6 percentage point to 14.6% (midpoint of 11.9%-17.3% band) from 15.2% previously (i.e. in the October Report), which is also lower than the 16.5% analysts' forecast in the latest CBRT Expectation Survey (January) and the New Economic Program forecast of 15.9%. The CBRT also cut the 2020 year-end forecast to 8.2% (midpoint of 5.1%-11.3% band) from 9.3%. According to the Bank, CPI-inflation will slow to 5.4% in 2021, and to the official target of 5% in the medium term. (Click here for the overview chapter and analytical boxes, and here for the summary presentation slides.)As for the details of the 2019 forecast revision, the decline in TL-denominated import prices (0.5 pp), a larger negative output gap (0.3 pp) and improvement in the underlying inflation trend (0.6 pp) drove inflation forecast lower, while the envisaged reversal of tax adjustments (0.2 pp) and the increase in unit labor costs (0.4 pp) drove it higher. For 2020, similarly, most of the 1.1 pps downward revision stemmed from the decrease in TL-denominated import prices, improvement in underlying inflation trend and the (downward) revision to the (negative) output gap. The Bank revised its 2019-20 oil price (Brent, average) forecast sharply down to $63.1 and $63.8, respectively, from $80 and $76.2, while maintaining food inflation forecasts for 2019-20 at 13% and 10%, respectively. Notably, the CBRT revised down the output gap estimate for the final quarter of 2018 to -4.2 pps from -3.6 pps previously, confirming the deepening of the contraction in economic activity in Q...