The CBRT published its new inflation report yesterday and made no changes to its end-2024, end-2025, and end-2026 inflation forecasts of 36%, 14%, and 9%. The mid-point forecast trajectory shows the bank expects annual inflation to continue to rise in the near term, reaching 73% in May, before rapid disinflation takes hold in Q3 and Q4.
Compared to the November inflation report, a smaller output gap estimate, higher unit labour costs, import prices, and food prices would have added roughly 3pp to the end-year inflation forecast. But the bank believes that the impact of monetary tightening on pricing behaviour and underlying inflation dynamics has been stronger than expected, counteracting these upward pressures and leaving the end-year estimate unchanged.
Regarding the near term course of policy, Governor Karahan largely reiterated the guidance from the January MPC meeting (Then we came to the end, 25 January). He said that the tightening cycle is now over and that it is too soon to discuss rate cuts.
He added that the rate-setting committee will maintain the current policy stance until there is a significant decline in the underlying inflation trend and inflation expectations fall towards the bank’s inflation forecasts.
Of these two preconditions, the former is more straightforward to measure. In addition to various domestic demand indicators, the bank monitors the seasonally adjusted monthly change in core inflation measures to gauge the underlying trend of price growth. CBRT estimates that this measure peaked at close to 7% m-o-m in October, fell to 2.9% in December, and rose – temporarily in the bank’s view – to nearly 4% in January.
Policymakers expect this measure to fall to below 2.5% in Q3 and to c1.5% in Q4, underpinning the sharp disinflation in the CBRT’s numbers.
Regarding inflation expectations, the bank publishes a monthly survey of market participants, with roughly 70 respondents, drawn largely from the financial sector. This survey estimated end-2024 inflation at 42% in January (our forecast is 47.9%). It is unclear if there are other indicators the bank monitors to gauge how expectations and pricing behaviour are evolving.
All considered, we stick to our view that the policy rate will remain on hold throughout 2024 and that risks are tilted in the direction of more tightening in the near term. During his comments, Governor Karahan put significant emphasis on the point that inflation in Q4 23 rose less than expected and that there has been an improvement in underlying pricing behaviour (annual inflation rose by 3.3pp during this period; the bank believes 2.4pp of this was due to higher natural gas prices). It remains to be seen if this trend will continue. If it does not, we think the bank may have to consider further tightening.
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