Turkey: Inflation outlook left unchanged

Turkey: Inflation outlook left unchanged

The CBRT left its end-2013 inflation forecast unchanged at 5.3%, with a 70%-probability forecast range of 3.9-6.7%. CPI inflation is forecast to slip to 4.9% by end 2014 (with a 70%-probability forecast range of 3.1-6.7%). The official inflation target was kept at 5% for both years. The CBRT sees annual inflation rising in January on the back of tobacco tax hikes and resuming a downward trend thereafter. Core inflation is forecast to maintain its downward trend and fall below 5% by year end.

During the press conference, the bank’s governor focused on credit growth and the real effective exchange rate. The CBRT aims to contain credit growth at 15%, he said, and keep the real effective exchange rate broadly flat. Hence, the pace of capital flows and the evolution of the TRY will remain crucial to the CBRT’s interest-rate decisions. In addition, if the pace of credit growth exceeds 15% for an extended period, the CBRT will take additional macroprudential measures. The governor said that the credit growth target of 15% was in line with the medium-term inflation target of 5% and GDP growth of 5%.

The CBRT said that domestic demand in H1 2013 was likely to be stronger than its October projections, but that the output gap in the second half of 2012 was higher than envisaged, too. As a result, the stronger growth dynamic did not prompt a revision of the bank’s 2013 inflation forecast. Its oil-price assumption for 2013 was revised up slightly to USD 108/bbl from USD 107/bbl, while the non-energy import price assumption was revised down a tad. As a result, the change in the imported goods price assumption did not lead to a revision of the CPI forecast either. The bank left its food inflation projection unchanged at 7% and assumed no additional tax hikes this year.

Among the inflation report’s risk scenarios, the CBRT noted that despite the reduction in global uncertainty a reversal of risk appetite was still possible. If this should happen, the CBRT said it would respond by utilising its flexible monetary policy framework (read pushing market rates towards the ceiling of the interest-rate corridor). If capital inflows remain robust and credit growth exceeds 15%, the CBRT said it would take additional macroprudential measures. It should be noted that the CBRT did not refer to additional rate cuts in this scenario, which supports our view that the CBRT could allow some appreciation of the TRY before resorting to additional monetary easing. Another risk scenario in the inflation report envisages a rapid recovery in global economic activity and this would prompt the CBRT to tighten monetary policy by utilising all policy tools available.

All in all, we continue to expect the CBRT sit on its hands unless the TRY strengthens significantly from its current levels. Neither the inflation report nor the January MPC statement referred to additional rate cuts in the forthcoming period, suggesting, in our view, that the CBRT is inclined to remain on hold. As regards credit growth, we believe the bank will continue to hike the reserve requirement ratios, but will not ask for further regulatory measures from the BRSA at this stage. We believe the risks to the CBRT’s inflation forecast are to the upside. The possibility of additional administered price increases and their second-round effects, an expected increase in food inflation due to its mean-reverting nature, accompanied by a loose policy stance, suggest that it will remain difficult for the CBRT to meet its inflation target of 5% in 2013. We forecast inflation to increase to 6.5% by the end of the year.

Selim Çakır