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The Central Bank of the Republic of Turkey raised its inflation forecast for 2020, did the president moderate the emphasis?
In presenting the latest inflation report of the year, CBRT Governor Uysal stated that they have lowered the inflation expectation for 2020, which was previously announced at 8.9 percent, to 12.1 percent. The inflation expectation for 2021 increased from 6.2 percent to 9.4 percent.
Uysal used the following expressions in the presentation of his report:
World economic activity, which reached its lowest level in April, partially recovered. However, global activity is below the period before the epidemic. Uncertainty about the economy continues.
Prices of raw materials exceeded pre-epidemic levels. The expansionary fiscal and monetary stance has continued in developed and developing countries. High uncertainty is hampering the flow of funds to developing countries.
Turkey’s risk premium fluctuates and is being watched. Portfolio outflows in Turkey has increased in the third quarter, increased volatility in the exchange rate. Economic activity recorded a marked ‘V’ recovery in the third quarter. The recovery continues in September and October. We are likely to see positive growth in 2020.
Gold imports reached historically high levels due to the effect of dollarization. Imports will decrease with the normalization of credit policies. Half of the job loss was made up in the second half of the year. Leading indicators show that employment conditions are improving. Inflation followed a higher-than-expected course with strong credit boost and TL depreciation. With the normalization steps, the pressures on the supply side have eased somewhat. Food prices continue to rise.
The increase in inflation expectations continued in the third quarter of the year. In August, we began to take adjustment measures within the scope of liquidity measures. We made a change by gradually reducing the specific liquidity possibilities. In September, we thought that tighter measures were needed to control inflation. In this context, we increase the policy rate by 200 basis points.
We have achieved a gradual increase in the weighted cost of financing. We reduced the participation of the weekly and quarterly buyback auctions.
Inflation expectations revised upwards
The oil forecast for 2020 was 41.6. We have raised our food inflation forecast for the end of 2020 to 13.5 percent. We also lowered the CPI expectation to 12.1 percent. The CPI forecast for 2021 was 9.4 percent.
The predictions were made with the expectation that there would be no second wave in the epidemic.
With recent policy measures, the trend towards normalization of commercial and retail loans has become more apparent. After the first quarter of 2021, inflation will slow down.
The reestablishment of the disinflation process is of great importance for the fall in the country’s risk premium, the fall in long-term interest rates and the recovery of the economy. A strict stance on monetary and liquidity policies will be maintained until a significant improvement in the inflation outlook is achieved.
“We are not targeting a nominal or real exchange rate in the currency.”
We provide flexibility in the framework of monetary policy. The step taken in the late liquidity window does not mean a permanent exit without simplification. The weighted average funding level is an important indicator that shows the rigidity of the CBRT. In this period, the weighted average financing cost and overnight interest should be focused.
The exchange rate movement is affected by many factors. Like CBRT, we do not target any nominal or real exchange rate. It will reach a point in line with macroeconomic realities in the medium term. In real terms, the TL is extremely useless. The worthless TL presents risks to price stability.
We have the opportunity to use all the tools we have for the inflation view. We can take the necessary measures, including the policy of interest, we do not limit ourselves.
The pass-through of the exchange rate is around 20 percent on average.
Recently, we offer different possibilities to the banking sector for the convenience of liquidity. The use of swaps can generate changes in reserves. Approximately 60 percent of the financing needs of the system are provided by swaps. Care is taken that the interest rate generated here is compatible with monetary policy. We have the opportunity to change the swap rates when necessary. We can use them as a tightening tool when necessary.
There was pressure on reserves during this period. We expect the pressure from the credit channel to ease. The pressure on the current account balance and reserves is expected to ease. There may be a reversal at the exit of the portfolio.
Public banks can participate actively in the market, although not as much as in the past.
We made concrete progress in some of the trade talks, we are nearing the end. When these turn out, we consider it appropriate to explain. We do not have exchange negotiations with the Bank of Japan, but we do with the Asian side. Efforts continue to further increase the agreement with China.
There may be parties that we lack in communication, we do self-criticism. We will make an effort to increase communication in the next period. But we are going through extraordinary circumstances, it would be better if they were dealt with fairly.
Monetary policy will continue to take the necessary steps in financial stability and price stability, and it is taking, the Central Bank gave a strong reaction, began to see its effects and this process continues.
The exchange rate has increased since the previous reporting period, inflation has remained stable
In the previous inflation report announced by CBRT in July, the inflation expectation for 2020 was increased to 8.9 percent. In the report, the food inflation forecast for the same period was set at 10.5 percent, while the expectation for oil prices was announced at $ 41.6.
There has been a rapid rise in the exchange rate since the last report announced in July. The dollar rate, which was around 7 on July 29 when the previous report was announced, rose 17 percent to more than the 8.23 level, hitting an all-time high. Since the report announced in July, there has been a slight downward momentum in oil prices.
It was observed that the general inflation data published since July showed a flat course. According to data from the Turkish Institute of Statistics, while annual inflation of 11.76 percent in July and August stood at 11.77 percent and 11.75 percent respectively in September.
On the other hand, inflation expectations deteriorated. Central Bank of the Republic of Turkey conducted last year and expectations survey in July, reflecting market expectations of 10.22 percent, while inflation expectations, those expectations in October 11.76 ‘and for percent of production in the survey.
Different monetary policy framework compared to the previous reference period
Before the inflation report published in July, interest rate cuts were followed in monetary policy, after this period different decisions were made in monetary policy. In September, the Central Bank increased its policy rate after 2 years. The bank increased the policy rate by 200 basis points to 10.25 percent.
In October, while the policy rate was held constant, the late liquidity window, which determines the upper limit of the liquidity adjustment steps, was increased by 150 basis points to 14.75 percent. With the effect of these movements, the weighted cost of financing reached the limit of 13 percent.
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