The CBRT signals to remain tight as long as needed, while new fiscal measures signal that the policy mix will be more coordinated. Considering the lagged impact of policies, we believe additional macro-prudential measures to contain still solid consumption would be needed.
Key points
In the second inflation report of the year, the CBRT revised its 2024 point interim inflation target upward by 2pp to 38%, while keeping the upper bound of their forecasted range unchanged at 42%. The stronger than expected inflation by 4pp in the first four months of the year led them to make this revision since they would not be able to compensate the deviation with the additional tightening of March.
The CBRT wants to observe the lagged effects of the tightening on demand conditions and inflation expectations, and consequently on the inflation trend. They continue to signal that additional tightening will be implemented in the case of a significant deterioration in the inflation trend.
Domestic demand continues to be supported by high inflation expectations, wealth effects and availability of credit card spending. Keeping financial conditions tight for longer will be needed to start a sustained path to unwind current regulations in order to strengthen the monetary transmission mechanism.
The most recently announced fiscal package refers to savings around 0.2-0.3% of GDP in 2024. New measures will also be taken in the coming period and many of them will be effective in the medium run.
If inflation trend improves to a level that the year-end inflation falls below 42% -upper bound of the CBRT forecast range- on a more coordinated policy mix, there might be a limited room to start easing with very gradual steps in 4Q24. Yet, lagging fiscal effects and macro-prudential policies on retailer spending reduce the likelihood of a cutting cycle sooner.
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