CBRT catches the market with its inflation forecasts, could not break the policy uncertainty

At the 4th Inflation Report meeting of the year, CBRT increased its year-end inflation expectation from the previous 8.9% to 12.1%. Exchange cost pressure on import prices, output gap, food inflation and inflation has been the basis for revising its projections within the framework of the main trend of inflation.

At the 4th Inflation Report meeting of the year, CBRT increased its year-end inflation expectation from the previous 8.9% to 12.1%. Exchange cost pressure on import prices, output gap, food inflation and inflation has been the basis for revising its projections within the framework of the main trend of inflation. Thus, the estimates were revised above the 10.5% projected in the New Economy Program announced at the end of September. The inflation expectation for 2021 was revised from 6.2% to 9.4%. The 2021 expectation in the NEP is 8%. The food inflation expectation was revised from 10.5% to 13.5% for 2020 compared to the previous forecast. We can say that the Central Bank's inflation expectations, which are also higher than the NEP estimates, are more in line with the market expectations, taking into account the effect of current conditions.

Of course, the issue that was wondered about as much as the inflation expectations of the Central Bank, even more than that, was about the interest action made in the last MPC. As it is known, the Central Bank did not touch the 1-week repo rate, which we call the policy rate at this meeting, but opened the gap between borrowing from the upper limit and the interest corridor with the increase in the LLW. The weighted average funding cost has increased by around 500 bps since July. The tightening provided by the transmission mechanism operating at market rates actually slowed down the loan growth. In practice, the tightening was achieved at market rates, and the increase in the policy rate in September MPC matched the interest rate corridor to the tightening in real terms. At the same time, the automatic adjustment of the interest rate corridor opened up space for additional tightening. The Central Bank expanded the reference range in terms of borrowing from the upper limit by only increasing the LLW in October, but the policy rate was not at an effective level, it remained lower and is no longer the interest of the Central Bank to be taken as reference.

At this point, the instruments that have a determining effect on the WACF side are the liquidity provided to banks through traditional repo auctions, whose costs are shaped around LLW and overnight lending costs. The transition effect of banks to resource costs through the transmission mechanism provides an effect that increases interest rates in reality and still slows down loan growth. As LLW is the upper band of funding at this stage as a reference, WACF will also continue to increase. However, inflation expectations continue to deteriorate, and the Central Bank's tendency to tighten over instruments that can be seen temporarily creates an action in the sense of policy uncertainty.

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