CBRT Survey of Expectations: The year-end inflation expectation for 2021 at 11.23%

In the CBRT February Expectation Survey, market participants' current year-end inflation expectation was 11.23%.

Looking at the short-term inflation expectations; February inflation is expected to be 0.78%, March inflation 0.86% and April inflation 1.08%. If inflation increases in line with the expectations in these months, annual inflation in February, March and April will be 15.46%, 15.80% and 16.05%, respectively.


The possibility of an upward deviation in inflation has increased due to the recent realizations and past inflationary effects. The high increase in PPI shows that the cost effect on prices will continue through the delayed transition to CPI. These cost effects stem from both past exchange rate increases and, independently of this, the increase in energy and commodity prices. We expect inflation to sit on the 15% path for a certain period of time in the first part of the year and to see its peak in April. Although the base effect that will work favorably in the second half of the year, decreasing exchange rate pressure and improving seasonal conditions support the decline in inflation, we see risks about limiting the decline in inflation due to chronic fragility factors. We see the risks of the Central Bank's 9.4% 2021 interim inflation forecast as upward.


According to the average inflation forecasts for 12 and 24 months ahead, inflation is expected to realize at levels of 10.36% and 9.03%, respectively. Thus, the average of inflation expectations for 12 and 24 months ahead became 9.70%.


The WACF expectations for the end of the month were 17% as a result of the CBRT's determination of the 1-week repo rate as the only funding tool and no interest rate increase was expected as a median estimate from the MPC on February 18. Interest rate expectations in the Repo and Reverse Repo Market decreased from 17.09% to 17.04% for the end of the month. While there is a change from 12.59% to 12.37% in the 5-year GDBS interest rate expectations for 12 months, the 10-year GDBS interest rates are expected to be 12.05% after 12 months. In the previous forecast period, this expectation was at the level of 12.30%. The market foresees the 1-week repo interest rate, which is the policy rate of the Central Bank, is expected to 17, 17, 16.23, 13.47 and 10.80% in the current period and after 3, 6, 12, 24-month periods respectively.


The Central Bank stated in the Inflation Report and in its subsequent statements that tight monetary policies that support disinflation will be maintained for a long time, interest rate cuts will not be on the agenda in the near term and additional tightening may be made in case of deviation from inflation. Orthodox monetary policy implementation continues and its permanence is at the stage of being established. In addition, it is stated that policies will continue to be tight enough, in line with the medium-term inflation target of 5%. This shows that the interest rate will always be a certain amount above inflation. Of the Central Bank; We expect another interest rate hike due to the fact that the inflation path will settle above 15%, the exchange rate stagnates in the early period, the de-dollarization process is requested to accelerate, and there is no continuous foreign inflow other than periodic entries.


We expect the policy rate, which is 17%, to be increased by 100 basis points to 18%, in the MPC for the next week.


We see an improvement in growth prospects. It is seen that the 2021 GDP expectation, which was 3.9% growth in the previous survey period, changed to 4.1% growth. The forecast for 2022 was 4.3% growth in the February survey period. Although we see that economic activity has made a better than expected entry into 2021 with the manufacturing leading indicators announced, contraction is observed in the service sector due to the shutdowns. Although we see the 1Q21 period as challenging due to tightening policies and the effect of coronavirus, we think that the growth outlook may improve in the later periods of the year with the expectation that normalization with vaccination can be started later in the year.


Exchange rate expectations were 7.79 for the end of 2021. We see that the exchange rate expectations for 12 months ahead are 7.94.

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