Serious deviation in inflation target

Serious deviation in inflation target

With the Inflation Report issued by the Central Bank yesterday, the high deviation in the inflation target has now been registered. With the end of year inflation rate target at 5.3 percent, with an almost 1 point rise, the new target has been increased to 6.2 percent.

This revision by the Central Bank was welcomed by the markets as reasonable, and was interpreted as a correction in parallel with recent developments. It was also found to be positive with regard to the credibility of the Central Bank.

Besides, even the increased inflation rate is behind the estimates of the markets. While it is seen that the lowest year-end inflation estimate in the market is around 6.5 percent, estimates go up to 8 percent.

The Central Bank said the effect of the upward revision in the service prices, which is one of the reasons for the 0.9 point revision, would be 0.1 point. The real deviation stems from the increase in the oil and foreign exchange rates. It is estimated that oil and foreign exchange prices will have an increasing effect at a ratio of 0.8 on the end-of-year inflation revision.

The revision that the Central Bank applied to the 2014 inflation target was limited. The Bank increased the 2014 end-of-year inflation target from 4.9 percent to 5 percent.

With the Inflation Report issued yesterday, it is understood that July inflation rates will also be high. In the report, it was stated that with the month of July, inflation would rise toward 9 percent. The Central Bank foresees that a gradual drop in annual inflation will be experienced, starting with the month of August.

Expectation of a fluctuating course

Market players could not get a clear sign from the Inflation Report issued yesterday as to possible market expectations. They were simply met with a base scenario, as was contained in the text issued after the July meeting of the Monetary Policy Board, that read as follows: “The cautious stance in monetary policy will continue until the inflation outlook is harmonized with medium term targets, if necessary, additional monetary tightening will be introduced.”

Market players, trying to obtain signals in the Inflation Report about market movements in the coming term, concluded that it was obvious the Central Bank would in the next term engage in tightening by drawing money from the market; in other words, instead of increasing interest rates, it will opt for monetary tightening, with exceptional practices.

From this, the conclusion is drawn that in the case of global or political problems, volatility in the markets will be high. In other words, it is concluded that the Central Bank, if there is a need, will again act timidly in interest rate increases.

In short, it has been officially admitted that inflation plans will not be met. However, while fighting inflation requires the use of the weapon of interest rate, it is understood that the Central Bank will use this weapon only cautiously and is planning to maintain stability without increasing interest rates. In other words, it will impose a fairly flexible policy in fighting inflation because of political influences.