Q4 Inflation Report: Paving the way for further cuts

TURKEY - In Brief 31 Oct 2019 by Murat Ucer

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The CBRT released this year's final Inflation Report today. As expected, the 2019 yearend inflation forecast was revised down to 12% (midpoint of 11.2%-12.8% band) from 13.9%, which is also in line with the New Economy Program forecast released earlier. The 2020 yearend forecast remained unchanged at 8.2% (midpoint of a 5.3%-11.1% band), after which inflation is expected to slow further to 5.4% in 2021, and to the official target of 5% in the medium-term.As the Bank explained, the downward revision in this year’s estimate is driven by three factors, namely the lira-dominated import prices, improvement in underlying inflation trend and food prices, which are expected to shave off 0.3, 1.1 and 1.2 percentage points (from the previous forecast), respectively, but this is only partly offset by the increase in tobacco prices and upward revision to the output gap (at +0.6 pp and +0.1 pp, respectively). For 2020, lira-dominated import prices and improvement in underlying inflation trend will shave off 0.2 and 0.3 pp from year-end inflation, which will be offset by 0.5 pp contribution from upward revision to the output gap. The latter means that the Bank is now expecting a stronger economy next year, which is presumably closer to NEP’s 5% target, though how this growth will happen and/or if it were to happen, how inflation would continue to decelerate toward 8% remains an open question. “Under a tight monetary policy stance and strong policy coordination focused on bringing inflation down, inflation is projected to converge to the target gradually,” the Bank says in a brief presentation (link here), but both claims in the sentence – whether monetary policy is tight enough and ...