“Increase in costs increases upside risks to inflation via PPI” By Investing.com


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Investing.com – CBRT, which increased by 200 bps to 17% in the last PPK meeting of the year held on December 24, released today. Drawing attention to the continuing rise in inflation, the center said, “Although crude oil prices remained below their pre-epidemic levels, they increased significantly following the previous MPC period. In addition, the ongoing upward trend in non-energy commodity prices, particularly industrial metals and agricultural products, was driven by producer inflation. It increases the upside risks on consumer inflation. In addition to exchange rates, developments in international prices adversely affect the inflation trend, especially in food and core goods groups.. ” He gave place to his statement.

Other descriptions of the center:

Developed and developing countries maintain their expansionary monetary and fiscal stances. While long-term interest rates in developed countries maintain their course at historically low levels, both central bank statements and market expectations indicate that the low interest rate environment will continue for a long time. The effectiveness of the policies implemented on financial markets, growth and employment may differ depending on the course of the epidemic by countries and the size of the policy areas.

– Due to the improved risk perception in the portfolio markets of developing countries, high amount of inflows continued following the previous MPC period. Excluding China, it is seen that entries to both debt and stock markets increased in December. Reinforcement of the perception that policy rates will maintain low levels in developed countries and incentive packages are considered as factors that can maintain the positive outlook in portfolio flows towards developing countries in the upcoming period.

– National income data and indicators for the last quarter point to a strong course in economic activity. The Gross Domestic Product (GDP) increased by 6.7 percent on an annual basis and 15.6 percent on a quarterly basis in the third quarter of 2020 and exceeded its pre-epidemic level. The driving force of growth was domestic demand, and net exports made a significant negative contribution to growth. During this period, a rapid increase was observed in private consumption and total investment expenditures. While the rapid increase in demand for durable goods with strong credit acceleration was the main determinant of the recovery in private consumption, expenditures for services remained weak due to the epidemic.

– Short-term indicators and high-frequency data indicate that economic activity has been following a strong course throughout the last quarter, although it has started to lose momentum since mid-October. October industrial production, turnover and retail sales volume indices increased rapidly compared to the third quarter averages. High-frequency data for the following months, capacity utilization rates and order indicators signaled that activity in the construction-related intermediate goods sectors, as well as durable consumer goods such as automobiles, white goods and furniture, which are sensitive to financing conditions, are active. Field discussions held in this period also confirmed the strong trend in domestic demand conditions. On the other hand, restrictions imposed due to the increasing number of cases create uncertainty regarding the short-term outlook of economic activity, especially in the services sector. The Committee considered that the effects of the sectoral divergence that emerged within the framework of the epidemic dynamics and macro policy mix on inflation and the risks it entails for the next period should be followed up.

– The Board emphasized again that monetary policy decisions will be taken with the priority of price stability within the framework of inflation targeting regime. The monetary policy stance will be determined with the focus on lowering inflation with a cautious approach and achieving the target of price stability in the medium term, taking into account the upside risks to the inflation outlook.

– Managed / directed price and tax adjustments, breaking the past inflation indexing behavior in incomes policy, observing compliance with inflation targets and increasing predictability are key components of the fight against inflation. The adoption of the inflation targets by all stakeholders, the execution of the efforts for price stability in a common understanding and social consensus, and the determination of macro policies in coordination with the projected downward path in inflation will strengthen the effectiveness of monetary policy. In this context, the possible effects of the minimum wage to be determined for 2021 and the administered / directed price and tax adjustments on the inflation outlook through total demand and cost channels were evaluated.

– Domestic demand conditions, cumulative cost effects, especially the exchange rate, the rise in international food and other commodity prices and the deterioration in inflation expectations continue to adversely affect pricing behavior and inflation outlook. Accordingly, the Committee has decided to make a strong monetary tightening, taking into account the 2021 year-end forecast target, in order to eliminate the risks regarding the inflation outlook, to control inflation expectations and to restore the disinflation process as soon as possible. In this context, the one-week repo rate, which is the policy rate, was raised from 15 percent to 17 percent. In the upcoming period, the tight monetary stance will be resolutely maintained, taking into account all factors affecting inflation, until strong indicators are formed that point to a permanent decline in inflation and price stability.

– It has been evaluated that the permanent establishment of a low inflation environment will positively affect macroeconomic and financial stability through the decrease in country risk premiums, the initiation of reverse currency substitution, an increasing trend in foreign exchange reserves and a permanent decline in financing costs.

– The Board reiterated its assessment that a strong policy coordination and an integrated macro policy mix that includes all stakeholders is needed to ensure price stability.

– The CBRT adopts an analysis framework based on all factors affecting inflation and the interaction of these factors with a medium-term perspective in its decision-making processes.

Author: Necdet Erginsoy

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