CBRT Survey of Expectations: Year-end inflation expectation at 11.76%

In the CBRT October Expectations Survey, market participants' current year-end inflation expectation was 11.76%. (Tera Yatırım)

In the CBRT October Expectations Survey, market participants' current year-end inflation expectation was 11.76%. Looking at the short-term inflation expectations; October inflation is expected to be 1.62%, November inflation 0.75% and December inflation 0.65%. If inflation increases in line with the expectations in these months, annual inflation in October, November and December will be 11.33%, 11.74% and 11.64%, respectively.


Inflation expectations are deteriorating rapidly. While the cost impact of the depreciation in TRY was felt intensely in producer inflation in August and September, it is seen that the core inflation trend has reversed significantly. Although we expect this exchange rate effect, which is not fully reflected on the CPI side, to pass through the cumulative and lagged mechanism in the following months, we anticipate that the additional value losses in the TRY will increase this effect. In this context, the pressure on inflation will continue in the rest of the year.


According to the average inflation forecasts for 12 and 24 months ahead, inflation is expected to realize at levels of 10.53% and 9.05%, respectively. Thus, the average of inflation expectations for 12 and 24 months ahead became 9.79%.


The WACF expectations for the end of the month increased from 10.58% in the previous survey period to 12.47% with the effects of the CBRT closing the repo window in liquidity provided to the market and forcing banks to borrow at higher rates. Interest rate expectations in the Repo and Reverse Repo Market rose from 11% to 12.83% for the end of the month. While there is a change from 12.42% to 12.74% in the 5-year GDBS interest rate expectations for 12 months, it is expected that the 10-year GDBS interest rates will be at the level of 13.01% after 12 months. In the previous forecast period, this expectation was at the level of 12.71%. The market forecasts the 1-week repo interest rate, which is the policy rate of the Central Bank, is expected to be 11.64, 12.39, 12.07, 11.07 and 9.46% in the current period and after 3, 6, 12, 24-month periods respectively.

With the average funding cost above inflation, we moved to a positive real interest position in terms of the overall funding composition. In an environment where the traditional repo auctions interest rate is around late liquidity window 13.25%, and overnight borrowing limits are halved, we expect the weight of LLW to increase and the increase in funding costs to continue. We expect the Central Bank to continue to hike interest rates in order to strengthen its real interest position within the framework of its funding composition and to open up additional tightening. Inflation expectations are deteriorating rapidly, and the continued increase in exchange rates can be expected to have an additional effect. In this context, we think that the Central Bank will hike interest rates by at least 150 basis points on October 22, or even exceed it.


We expect a new 175 basis point rate hike in next week's MPC; Thus, the policy rate will be 12%, the upper band of the interest corridor will be 13.5% and the late liquidity will be 15%.


Growth expectations are in a contraction position due to the pandemic effect and tightening in financial conditions. Contraction expectations for 2020 realized at 0.8%. In the previous survey period, this estimate was 1.5% contraction. The 2021 forecast was 4.1% growth in the October survey period. Although we see the strong recovery effect in the 3Q20 period as positive in terms of growth throughout the year, we expect a more limited outlook in the last quarter due to the tightening in financial conditions limiting domestic demand and the ongoing Covid risks. We anticipate that the general economic growth will remain in a contraction position for 2020, and in 2021, if the bad scenario does not materialize, a growth of around 5% with a strong base effect.


Exchange rate expectations were 7.90 for the end of 2020. We see that the exchange rate expectations for 12 months ahead are 8.31.

Kaynak Tera Yatırım
Hibya Haber Ajansı