Central Bank expects inflation to rise due to currency and cost impact By Investing.com


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Investing.com – CBRT Governor published the first summary after Ağbal’s dismissal. While the interest rate was kept constant at the meeting chaired by Kavcıoğlu, the hawkish expressions in the text of the decision were removed. The following statements were included in the PPK summary announced today:

The monetary policy stance will be determined with the focus on permanently lowering inflation and reaching the price stability target with a cautious approach, taking into account the upside risks to the inflation outlook. In this respect, the policy stance will continue to be determined at a level of tightness that will establish the disinflation process as soon as possible, taking into account inflation developments and inflation expectations, and ensure its continuity until the medium-term targets are reached.

Demand and cost factors, supply constraints in some sectors and high levels of inflation expectations continue to pose risks on pricing behavior and inflation outlook. The slowing effects of the current monetary stance on loans and domestic demand are expected to become evident in the upcoming period. Accordingly, the Committee has decided to maintain the tight monetary stance by keeping the policy rate constant at 19 percent.

* In the first two paragraphs, it is stated that the rate of 19% is kept constant with the expectation of an increase in inflation and the understanding of interest on inflation.

Tight monetary stance; It will serve as an important buffer against external and temporary volatility in the context of inflation expectations, pricing behavior and financial market developments.

* It is especially aimed to protect the volatility in the exchange rate.

In line with the main objective of price stability, the CBRT will continue to use all the tools it has at its disposal. Until strong indicators that point to a permanent decline in inflation are formed and the medium-term 5 percent target is reached, the policy rate will continue to be set at a level above inflation, maintaining a strong disinflationary effect.

*It is stated that interest rates will be changed according to the inflation outlook.

Stability at the general level of prices will positively affect macroeconomic and financial stability through the decline in country risk premiums, the start of reverse currency substitution, the trend of increasing foreign exchange reserves and permanent decline in financing costs. Thus, a suitable ground will be created for the continuation of the increase in investment, production and employment in a healthy and sustainable manner.

Demand and cost-side effects on inflation remain important in line with the indicators of credit market and economic activity, as well as exchange rate volatility and developments in import prices. The outlook for domestic demand, international prices and global risk appetite keep the risks arising from external financing needs for the balance of payments alive. In line with the price stability target in monetary policy, the Committee will continue to adopt an approach that takes into account the risks to financial stability.

* Attention was drawn to the risks created by the increase in the exchange rate on sectors other than inflation. In addition, it was emphasized that the decrease in foreign capital will increase the financing deficit.

This MPC meeting does not contain hawkish expressions of the November-March period, but it is important to state that the interest rate will be changed according to the situation in inflation and other indicators, because in this direction, it comes to the conclusion that the interest rate should remain higher for a while depending on the main indicator of inflation, and the interest policy on inflation supports. Of course, it remains the most curious issue whether these discourses and expressions will be implemented with determination.

Author: Necdet Erginsoy

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