CBRT Expectations Survey: Year-end inflation expectation at 14.18%

In the CBRT December Expectations Survey, market participants' current year-end inflation expectation was 14.18%.

Looking at the short-term inflation expectations; December inflation is expected to be 0.90%, January inflation 1.29% and February inflation 0.66%. If inflation increases in line with the expectations in these months, annual inflation in December, January and February will be 14.20%, 14.14% and 14.49%, respectively.


The balance of risk in inflation continues to be upward. It is understood from the high PPI increase that the cost impact of the exchange rate increase did not fully pass on consumer prices. PPI, which reached 23.1% on an annual basis as of November, increased by 4.08% on a monthly basis. The manufacturer's cost undertaking is an indicator of price increases in the coming months. The issue of continuity of the tight policies currently implemented by the Central Bank is monitored. Since the dollarization tendency of the domestic savers has not been completely broken, exchange rate fluctuations occurred in short periods. Seeking to see more evidence on policies may add to inflation stickiness for a while, due to market movements that it creates in the short term. Seasonal and climatic factors that are particularly effective in food inflation should not be forgotten. Drought can be a serious problem. Apart from these factors, foreign currency-based pesticide, fertilizer and transportation costs should also be taken into account, independent of production and yield. In the new period, general economic policies in coordination with monetary policy should be followed and the fight against inflation should be handled as a whole.


According to the average inflation forecasts for 12 and 24 months ahead, inflation is expected to be at 10.84% ​​and 9.24%, respectively. Thus, the average of inflation expectations for 12 and 24 months ahead became 10.04%.


The WACF expectations for the end of the month increased from 14.74% to 16.07% as a result of the CBRT's determination of the 1-week repo rate as the sole funding tool and the interest rate hike expected from the MPC on December 24. Interest rate expectations in the Repo and Reverse Repo Market increased from 14.84% to 16.09% for the end of the month. While there is a change from 12.71% to 12.87% in the 5-year GDS interest rate expectations 12 months later, the 10-year GDBS interest rates are expected to be at the level of 12.49% after 12 months. In the previous forecast period, this expectation was 12.65%. The market forecasts the 1-week repo interest rate, which is the policy rate of the Central Bank, is expected to 16.18, 16.39, 15.61, 13.18 and 10.71% in the current period and after 3, 6, 12, 24-month periods respectively.


We expect a strong and proactive approach from the Central Bank within the framework of adherence to orthodox monetary policies and adequate tightness against inflation. Therefore, we expect the policies to be implemented at the current tightness or more in the near term. Within the framework of inflation deviation and additional risks, we expect the Central Bank to operate the response mechanism without waiting. For this reason, we expect the interest rate hike at the closest MPC, and then the financial conditions to be as tight as possible in the first half of the year. We think that the interest rate should remain at a high level in a safe zone against inflation in order to accelerate the hot money inflow and the de-dollarization process of locals. In general, the standard for emerging countries is that the central bank rate is about 2-3 points above inflation.


We expect a new 200bp rate hike in next week's MPC; Thus, the policy interest will reach 17%.


We see an improvement in growth prospects. With the support of loan growth and consumption trends, the effect of strengthening demand led to a strong 6.7% growth in 3Q20. It is seen that the 2020 GDP expectation, which was 0.6% contraction in the previous survey period, changed to 0.5% growth. The forecast for 2021 was 3.8% growth in the December survey period. While we see the strong recovery effect in 3Q20 as positive in terms of growth throughout the year, we expect the impact of the recent tightening in financial conditions to limit domestic demand and the effect of new restriction measures that coincided with the end of the year to slow down the economy.


Exchange rate expectations were 7.77 for the end of 2020. We see that the exchange rate expectations for 12 months ahead are 8.37.


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