CBRT Inflation Report Preview: Policy guidance to be the main issue

The CBRT will announce the 4th Inflation Report of the year tomorrow. At the MPC meeting on October 22, the Central Bank, which did not increase the policy rate by going beyond expectations and making a negative effect in a sense, may share messages that will clarify this issue tomorrow, with the guidance of the forward-looking monetary policy, after the different decisions taken in the September and October MPCs. The subject to be followed by the market, especially in the question and answer section, will be the communication on monetary policy guidance.

The concern that the signal of the Central Bank to continue tightening indirectly by emphasizing the interest rate corridor and the LLW in the monetary policy will be insufficient to protect the TRY causes the increase in the exchange rate to continue. The implementation of monetary policy on the basis of the interest rate corridor, a formula used before 2018 and not on the basis of the "simple monetary policy" implemented after 2018, creates an unpredictable situation in terms of revealing different opinions. If we summarize the opinions expressed in terms of monetary policy and pointing to uncertainty;


·        The issue of interest rates as well as the continuation of the tightening has become unclear. The unconventional monetary policy before 2018, in which the interest corridor and LLW were used as the policy rate function, could not stop the depreciation in TRY, the inflation targets were missed upwards and a decrease in reserves emerged. In an environment where reserves are weakened, back-door tightening is not welcomed.

·        The Central Bank's policy rate is kept low at an idle level, while on the one hand, the market interest rates and banks' costs are increasing, resulting in actual tightening in the short term; At the earliest opportunity, it may be interpreted as the Bank would ease policy to support credit growth.

·        The Central Bank may be reluctant to give a real interest rate high enough to stop the depreciation of the TRY.

·        In the last MPC, the CBRT stated in the policy text that the strong recovery in goods exports was supported by the real exchange rate. TRY may not be overpowered to increase competitiveness in exports.

·        The results of the US elections on November 3 may be wanted to be seen in terms of the economic and political consequences of a possible power change.


Rather than inflation expectations to be revised in the Inflation Report; We will follow forward-looking guidance on this issue. In the previous reporting period, the Central Bank announced its year-end inflation expectation at 8.9% and its 2021 forecast at 6.2%. In the New Economy Program announced at the end of September, the year-end inflation expectation was determined as 10.5% and the 2021 expectation as 8%. The average of market participants and real sector representatives in the CBRT Expectations Survey was 11.76% for the end of October, 10.53% and 9.05% for 12 and 24 months later, respectively.


The deterioration in inflation expectations deepens as TRY depreciates. Increasing inflationary pressures in current dynamics cause official expectations to remain optimistic and a situation where the deviation from targets may remain wide. Tomorrow, as the Central Bank revises its inflation expectations, we do not expect it to diverge more than NEP levels. Inflation expectations will also be a reference in terms of the level at which interest rates will occur, but it should be kept in mind that the increase in the policy rate, which was not made in the last MPC, signaled a non-sustained tightening policy. In this respect, the forward-looking policy communication of the Central Bank will be extremely critical.


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