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Turkey: inflation and monetary policy

January’s inflation report and last inflation figures:

  • The Governor of the CBRT debriefed last week on the first inflation report of the year (see pdf attached).
  • January inflation figure released at 12.15% yoy, higher than in December (11.84%). The rise in housing, electricity and energy were the main drivers pf this increase. Core inflation, remained quite stable at 9.9% yoy.

The CBRT forecasts inflation (see chart below) to be:

  • Between 6.2% and 10.2% in 2020  (with a mid-point of 8.2% at end-2020)
  • Between 3.0% and 7.8% in 2021  (with a mid-point of 5.4% at end-2021)
  • With 70% probability of this scenario to occur.

Main assumptions retained by the CBRT for its forecasts:

  • Output gap in Q4 2019 at -2.8% (previous forecast in Oct assumption -3.2%)
  • Oil price at 60USD in 2020 and 56.6USD in 2021
  • Import prices decreasing by -1.9% yoy in 2020 and -0.4% yoy in 2021
  • Food inflation at 11%yoy in 2020 and 7%yoy in 2021



Our views:

We think that the speed of the disinflation process estimated by the CBRT might be a bit optimistic

  • The assumptions retained in the CBRT scenario regarding oil prices, imports prices (so exchange rates) and food prices seem reasonable for 2020 in a supportive environment for global growth and risky assets.
  • For the time being, the impact of the coronavirus is assumed to be short-lived. But if not, it would of course change the scenario.
  • The CBRT considers the negative output gap as non-inflationary effect with no demand-led inflationary pressures.
  • We tend to disagree on that point especially as unemployment starts to decrease.
  • For 2021, we would have been more cautious on oil and food price normalization.

We stick to our view of an annual inflation at 11.5% yoy in 2020 (end-Dec at 9.2%) and revised a bit 2021 to 9.8% yoy from 10.3%, (see chart below):

  • In our scenario, we assume the Brent at 65USD/barrel, food inflation at 10.8% yoy, upward inflationary pressures coming from the recovery in 2020 but lower in 2021 and a progressive 10% depreciation of 10% the Turkish lira in 2021 .

An additional 50bp cut in H1 is plausible

  • In the inflation’s report, The Governor mentioned the relative stability of the Turkish lira while the CBRT turned dovish. Associated with no major changes in language and inflation forecasts, this point goes in the sense of further cuts in the coming months
  • Even though we think that rooms are very limited especially as real rates are already negative and risks on inflation remains tilted to the upside, we think that the Turkish authorities will continue to choose to support growth recovery.



Graph 1



Graph 2



HERVE Karine , Emerging Markets Senior Economist
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Turkey: inflation and monetary policy
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