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CBT Governor Basci described the current policy stance as cautious, flexible and data-dependent, while leaving the year-end 5.3% inflation forecast unchanged for 2013. The CBT's projection for next year's CPI is even lower at 4.9%. Although Basci argued that the reserve requirement hikes introduced in the January MPC meeting are sufficient for the time being, the Inflation Report leaves the door open for further macroprudential tightening depending on credit growth.
The CBT's 5.3% 2013 inflation forecast is quite ambitious. Our forecast is 6.4% and the difference mainly stems from our more conservative view on core inflation. The CBT aims to align inflation expectations with targets. We believe that it is part of the CBT's strategy not to revise up the inflation estimate to manage inflation expectations. Elsewhere, monetary policy messages more or less echo previous signals, albeit the reluctance of the Bank to imminently embark on additional tightening renders the tone of the Report less hawkish than expected.
Economic activity remained weaker-than expected in 2H12 according to the CBT, while the Bank upgraded its forecast for the pace of recovery anticipated in 1H13. The CBT expects economic activity to be less supportive of the disinflation trend in 1H13, yet this does not create much change in the Bank's inflation forecast vs. the previous Inflation Report.
There was no major change in the CBT's assumptions for oil and import prices, whereas the CBT presumed that the historically low food inflation environment will end in 2013. Therefore, it adopted a cautious forecast in that respect. According to the CBT's scenario, core inflation will be the main contribution to disinflation as the Bank envisages core inflation to fall below 5% by end-2013 from the current 5.8%.
CBT Governor Basci emphasized the structural shift in the global risk appetite and the risk perceptions regarding Turkey that urged the CBT to move to one of its risk scenarios. This new environment necessitated low interest rates and tighter macroprudential measures in order to curb undue appreciation pressures on the TRY and excessive credit growth.
However, Basci hinted that the Bank is not necessarily biased towards being in a tightening cycle by underlining that the RRR hikes introduced in January are enough and upcoming decisions will depend on new data. In due course, while refraining from giving a bold message on the interest rate policy, Basci made it clear that the door is open to a policy rate cut and/or downward adjustment to the interest rate corridor, conceivably depending on the real effective exchange rate, which the CBT assumes to be stable.
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