The Riddle of the Reasonable Real Rate of Return

TURKEY - In Brief 01 Aug 2019 by Murat Ucer

The CBRT released the year's third Inflation Report yesterday. I am, in theory, on holiday, so I missed the presentation by Governor Murat Uysal and the Q&A that followed it. Now that I have read the speech, which is available verbatim on the CBRT site, and watched the Q&A, I wanted to share a few thoughts and reactions briefly. (The speech and video are here and here, both in Turkish; here is the Governor’s presentation and here is the overview chapter, in English.)First, the basics. As signaled at last week’s MPC statement -- and the consensus had already come to expect it, the CBRT revised its end-2019 inflation forecast slightly down from 14.6% to 13.9%, but quite unsurprisingly, kept the 2020 projection at 8.2% (all midpoints). The downward revision of the end-2019 forecast was mainly driven by food prices, TL-denominated import prices, improvement in the underlying trend inflation as well as lower-than-projected inflation in Q2, while a narrower (negative) output gap and tax adjustments lifted it.But given its low credibility and poor track record of inflation forecasts, it would make more sense for the Bank to wait on the revision, for at least two reasons. First, the lower than expected H1 inflation is somewhat of a controversial issue, as we don’t know whether it is driven by “economic factors” or “data anomalies”. Second, as usual, the Bank is quick to factor in the good news into its forecast, but ignores the risks (partly touched upon in our recent quarterly report, of July 28, 2019), some of which already seem to be materializing, like the recent increase in natural gas prices, with probably more to come, and more currency volatility down the road. As rega...

Now read on...

Register to sample a report

Register