CBRT Inflation Report, 2022/I: Estimates revised upward, but still seem optimistic

The CBRT increased year-end inflation forecast from 11.8% (forecast range: 9.6-14%) to 23.2% (forecast range: 18.6-27.8%) for 2022, increased from 7% (forecast range: 4.6-9.4%) to 8.2% (forecast range: 3.4-13%) for 2023 and announced at 5%, which is the medium term target, for 2024.

According to us, updated forecasts still seem optimistic and upside risks dominate these levels when we take into account the ongoing cost-side pressures, recent price and wage hikes, increasing geopolitical risks and elevated levels of commodity prices.

According to the CBRT’s forecast path, YoY CPI could continue to increase in 1H22 and reach around 50-55%. Even though CBRT expects a gradual drop on the YoY figures in 2H22, CBRT’s forecast path indicates that the YoY CPI could continue to stay above 40% until late 2022. The expected sharp drop in the end of 2022 could be seen as a reflection of basis effect due to the sharp monthly CPI increase in December 2021.

We should also note that the CBRT’s forecast range (3.4-14%) and mid point of the range (8.2%) for 2023 is too optimistic. To recall, CBRT’s Survey of Market Participants of January indicates that the market participants expect that the inflation could stay at the double-digit levels with a 95.5% of possibility in 24-months ahead.


Announcement of “Liraization” strategy


Announcement of “Liraization” strategy in the review of the policy framework is another important issue for today’s Inflation Report meeting. Governor Kavcioglu said that “Reshaping price stability on a sustainable basis is possible by making the Turkish lira the essential element of the financial system. The Liraization strategy is created with a holistic approach that focuses on the use of the Turkish lira in the system, through new financial products, collateral diversification and liquidity management practices. It is important that loans and monetary aggregates grow at a rate consistent with sustainable price stability and that the weight of the Turkish lira among these aggregates is increased. The focus of all implementations to be implemented in the near, medium and long term will be to ensure the Liraization of the financial system in order to reshape price stability on a sustainable basis”.

Removal of reserve option mechanism and CBRT’s support of the FX protected Lira deposits instrument are shown within the scope of the Liraization strategy. Governor Kavcioglu also stated that all or most of the CBRT’s funding facilities would be conducted in Turkish Lira.


Current account surplus target

Current account surplus target in the context of the new economic model approach and the Liraization strategy are shown as the critical instruments for the sustainable price stability. Governor Kavcioglu also said the banks should decrease loan interest rates due to the CBRT’s lower funding costs and lower cost from the FX protected TL deposit instrument. “Interest rates are decreasing and will continue to decrease”, Governor Kavcioglu added.

Even though there were no any other details for the ongoing comprehensive review of the policy framework, we think the share of FX swap funding (more than 50%) in total TL funding structure could decrease in the coming period and possible longer term repo auctions than 1-week could be used in that context and/or funding for expected selective loan growth approach when we take into account the messages of Governor Kavcioglu and Treasury and Finance Minister Nebati at the weekend.


By Erol Gurcan, Yatirim Finans


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.