CBRT Market Participants Survey: Inflation forecast for the next 12 months drops to 34.92%

In the CBRT December Market Participants Survey, the current year-end inflation expectation was 66.8% (Previous: 68.06%, a decrease of 126 basis points compared to the November forecast). When we look at the short-term inflation expectations; December inflation is 2.69%, January inflation is 3.39% and February inflation is 2.62%. If inflation increases in line with the expectations in these months, annual inflation in December, January and February will be 66.72%, 55.14% and 51.90%, respectively.

In the upcoming period, the rate of increase in inflation may decrease due to factors such as the decline in commodity prices, the base effect, restrictions on credit access, and public control over administered prices. On the other hand, the inflation effect of factors such as budget deficits arising from the election economy, early retirement, minimum wage, CGF and possible housing/automobile market packages should be calculated. Although inflation is likely to recede to 40% by mid-year, we think that the extra drop will be due to factors stemming from monetary policy and credit conditions.

The CBRT revised its year-end forecast from 60.4% to 65.2% in its latest Inflation Report published on October 27. The Central Bank’s perspective is that the increased supply and demand imbalances due to geopolitical risks and the rise in global energy and agricultural commodity prices triggered the rise in inflation. On the basis of these assumptions, the high role of food and oil prices was emphasized.

According to the average inflation forecasts for 12 and 24 months ahead, inflation is expected to be 34.92% (previous: 37.47%) and 20.56% (previous: 20.76%) respectively. Thus, the average of inflation expectations for the next 12 and 24 months became 27.74%. Inflation expectation after 5 years decreased from 9.49% to 9.11%.

Forward CPI expectations. Source: CBRT, Tera Yatırım

Interest rate expectations in the Repo and Reverse Repo Market were 9.18% for the end of the month. The market predicts the one-week repo rate, which is the policy rate of the Central Bank, as 9, 9, 14,86 and 12,94% in the current month and 3, 12 and 24 month future expectations, respectively.

The current interest rate/monetary policy has an unusual basis for reducing inflation in a concept where interest rates are lowered within the framework of the 9% policy rate, despite inflation of 84.4%. Within the framework of the guidance in the meeting statement, in which the CBRT lowered the policy rate to 9% on November 24, no change in interest rates is expected in the short term. The task of ensuring price stability is also carried out by alternative means within the framework of the economy view, which links the causes of inflation to supply and cost-based shocks in global commodity prices and to speculative price movements that are not thought to be based on domestic economic reasons. It is calculated that inflation will decrease with factors such as alleviation in global costs, controlling exchange shocks, and the function of financial stability instruments that are required to make the monetary transmission mechanism work. In this context, the Central Bank does not signal a return to its orthodox monetary policy and interest rate hikes despite the challenging conditions. The interest rates predicted after the 12-month period show that market participants expect a separator between the new economy perspective and generally accepted economic policies in the upcoming period.

We do not expect a change in interest rates in line with the guidance in the previous MPC text from the CBRT at its December 22 meeting.

Although strong expectations for this year are preserved in growth expectations, there are some downward revisions within the framework of some signs of loss of momentum. GDP forecast for 2022 decreased from 5.1% to 5%. The 2023 GDP growth forecast remained at the level of 4.1%. Recently, leading macroeconomic indicators point out that the slowdown in economic activity continues. While the growth target is fixed at 5% in the MTP, organizations such as the IMF and OECD predict that the Turkish economy will grow by 5% this year and 3% next year. Recently, leading macroeconomic indicators point out that the slowdown in economic activity continues.

While the current account deficit expectations for 2022 decreased from 48.76 billion dollars to 46.66 billion dollars; For 2023, it decreased from $31.09 billion to $30.62 billion. The current account deficit will likely remain high due to energy uncertainties. Although the energy crisis has lessened its marginal impact due to the mild season and some control of prices, future supply and demand conditions create uncertainty. In this context, since the effects of recession in Europe are not foreseen, the state of external demand and energy prices continue to be factors beyond our control. While services revenues continue to contribute positively to the current account balance, the increase in the foreign trade deficit continues, especially due to energy, gold and €/$ parity. Continuing the impact of geopolitical risks on energy prices, the course of Covid-19 measures in China and DXY, which maintains its strong course compared to last year, cause the upward pressure on imports to continue. The course of domestic demand continues to affect imports as well. We think that the current account deficit will remain high.

Exchange rate expectations for the end of 2022 were 18.78. We see that the exchange rate expectations for the next 12 months are 22.77. As a reflection of the calm course in exchange rates since the survey period in November, we observe that it is reflected in the year-end exchange rate expectation.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı