Central bank of Turkey revised up its end of year CPI inflation estimation; credibility still suffers

Through the announcement of its third Inflation Report of the year, Turkey’s central bank (CBRT) raised its year-end inflation forecast to 14.1% from 12.2% set in April. The revision still stands the consensus market expectation of 16% for the end of 2021.

The bank also revised up its 2022 CPI inflation estimation to 7.8% from 7,5% while reiterated its belief that inflation would ease to 5% by the end of 2023- to the official target level.

None of the figures stand attainable and hence credible.  The bank argues that remaining elevated around 18% during most of the summer months the CPI inflation will drop fast to 14.1% in November-December. The deteriorating inflation expectations, the ongoing strong demand, soon to enter zero real rates with the policy rate at 19% and the Fed’s possible start to tapering in 4Q21 that would add pressures on the value of TL stand as factors that could prevent the central bank’s path on the inflation.

No need to say that the 25 points gap between the producers prices (43%) and the consumer prices (17.5%) in Turkey with some 35-40% pass through stands as anther serious obstacle in lowering Turkey’s CPI inflation below 18-20% range by the end of 2021.

Hence, the central bank’s estimation at 14.1% would only mean to please President Erdogan keeping the rate cut on the table as Erdogan wishes to pull down the rates as Turkey is heading to possible early elections next year.

Governor Kavcıoglu’s calls to public for unified efforts to fight inflation are likely to remain unanswered as both the central bank’s inflation estimation and the official inflation numbers are not credible.