What to expect from the CBRT Inflation Report meeting?


The CBRT will announce the 3rd Inflation Report of the year tomorrow. The details that will be released from the report will be important in terms of messages and revisions that are likely to contain. In line with the Central Bank's decision of halting interest rate cuts in the last two meetings after cutting interest rates 9 times in a row, the inflation risks and the forward-looking outlook will be the details that will be in our focus.


As will be remembered, the rising upside risks in inflation caused the Central Bank to stop the serial interest rate cuts. Within the framework of the new normals that occurred with the pandemic period, both the supply-side and demand-side reflections shifted the inflation outlook from the cost and demand effect at the same time. Particularly, the ease of access to finance, which was created with the cut in interest rates for the recovery of the economy, increased the demand in private consumption and the prices went up in this period. The demand in the short term will not spread over a long period of time and will not have a sustainable effect especially in the context of decreasing the income of individuals. However, unit costs are rising and rigidity in inflation has a more permanent and long-lasting effect on prices. Supply level and service inflation rigidity, which were behind the pandemic period, will continue to affect inflation even if demand is withdrawn.


For the next period, the inflation base scenario is that the downward trend will come to the fore due to the “base effect”. However, it should be noted that the pressure in the main dynamics is upward and that the prices tend to increase. Inflation was at 12.6% in June. The policy rate is currently at 8.25%. In fixed income investments and bank deposits, the fact that the interest rate is lower than inflation helps the money circulate more, it also increases the risks, especially the effect of credit expansion on the economy to overheat, increase inflation and increase bank risks. As stated in the latest MPC's policy announcement that the risks for the year-end forecasts are upwards, and we expect that inflation expectations will be revised upwards at this meeting. The year-end expectation set at 7.4% in the last reporting period can be revised upwards and converge to the 9-10% or 9-9.5% band expected by the market participants.


The Central Bank seems to have come to the end of the easing cycle; in the framework of negative real interest position, rising upside risks in inflation, the need for inflation to decrease except from “base effect” and lower expectations of inflation in order to open a movement area for the Central Bank and the decision not to cut interest rates in the last 2 meetings.


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