Murat Uysal, Governor of the Central Bank of the Republic of Turkey, made a presentation at the “Inflation Report 2020-3” information meeting in Ankara.
At the beginning of his speech, Uysal touched upon global and domestic macroeconomic developments.
Pointing out that the weakening in global growth seen in the first quarter of the year due to the impact of the new type of coronavirus (Covid-19) epidemic deepened in the second quarter, Uysal said that there were signs of partial recovery in global economic activity in the third quarter with the easing of measures to limit the epidemic and gradual normalization steps.
Uysal pointed out that there are uncertainties regarding the strength and continuity of the recovery in global growth, and reminded that inflation followed a downward trend in the second quarter in developed and developing countries due to the weakening of the global growth outlook and the decline in crude oil prices, despite the increasing food prices during the epidemic period.
Stating that portfolio flows followed a relatively more positive course in July with the measures taken by the central banks of developed countries and the post-epidemic normalization process, Uysal said, “With the effect of the ongoing expansionary steps in monetary and fiscal policies, capital flows to developing countries are expected to recover slightly in the second half of 2020.” he said.
“We expect an improvement in tourism revenues with the easing of travel restrictions”
Uysal pointed out that the pressure on the currencies of developing countries has partially decreased due to the increase in global risk appetite following the normalization steps, and said:
“Thus, the negative effects of global developments on Turkey’s risk premium and exchange rate volatility were alleviated to some extent. The significant improvement in financial conditions due to the decline in inflation and interest rate cuts in the pre-pandemic period supported loan growth. During the epidemic period, the healthy functioning of the credit channel and companies’ cash flows Loan growth accelerated within the scope of the monetary and fiscal measures announced for the continuation of loans. When we look at loan types, we see that the increase in commercial loans remains strong, although it has lost some momentum in the recent period. Consumer loans increased in the post-May period due to the loan packages offered by public banks for housing and vehicle loans and the effect of deferred demand. has gained significant momentum.”
Explaining that the recovery that started in May gained strength in June and July, Uysal stated that a recovery was observed in the foreign trade volume, especially in exports, and the foreign trade deficit narrowed slightly.
Uysal stated that they expect a partial recovery in tourism revenues in the coming period with the easing of travel restrictions, and that the recovery in goods exports and low levels of commodity prices will support the current account balance.
Stating that the effects of the slowdown in the economy are felt in the labor market, Uysal noted that unemployment rates increased, but the decrease in the participation rate limited this increase.
Uysal stated that consumer inflation increased by 0.76 points to 12.62 percent in the second quarter of the year and was above the forecast range, and made the following evaluations:
“The increase in inflation compared to the first quarter was due to core goods and food groups. Unit cost increases due to the epidemic, cumulative exchange rate developments, food prices that increased due to periodic and epidemic-related effects with the recovery in international oil prices were effective in the increase in consumer inflation.”
Explaining that they foresee that the supply-side factors that are effective in the short term with the measures related to the epidemic will gradually disappear with the continuation of the normalization process, Uysal emphasized that they expect the demand-side disinflationary effects to become more evident in the second half of the year.
Uysal said that expectations for year-end inflation increased due to the increase in inflation in May and June, and that medium-term inflation expectations remained relatively flat.
CBRT’s measure sets
Reminding that the CBRT has implemented a temporary, targeted and comprehensive set of measures to limit the negative effects of the Covid-19 epidemic on the Turkish economy, Uysal said:
“In addition to the monetary measures we took to ensure that financial markets, the credit channel and the cash flow of companies continue to function uninterruptedly and healthily, we reduced the policy rate by a total of 250 basis points in March, April and May. In June and July, we lowered the policy rate in light of all the factors affecting the inflation outlook.” We kept it constant at the level of 8.25 percent. In the current report period, a significant part of the funding need of the system was met by Turkish lira swap transactions against foreign currency carried out within the CBRT and BIST. A change was observed in the composition of the funding provided through open market operations (OMO) due to the new opportunities put into effect after the epidemic. “In this context, the share of the funding provided to market maker banks in OMO funding increased with the funding provided through 3-month repo auctions within the framework of targeted additional liquidity opportunities.”
“Forecasts were based on macro view”
Uysal stated that the macro outlook is taken as a basis when producing medium-term forecasts and that they create assumptions for external factors such as import prices, food prices and fiscal policy. Compared to the previous report, Uysal stated that the oil prices assumption is based on the agreements of OPEC + countries to reduce production and the partial recovery in the global demand outlook. They reported that they increased the average from $32.6 to $41.6 for 2020 and from $36.8 to $43.8 for 2021.
Stating that they made a downward update for 2020 and 2021 due to the weak course of commodity prices other than oil, such as aluminum and agricultural products, in the assumption of import prices in US dollars, Uysal said that the food inflation forecast for 2020, which was taken as 9.5 percent in the previous report, was revised downwards in unprocessed food. He noted that they updated it to 10.5 percent, taking into account period trends.
Food inflation forecast
Uysal stated that they reduced the food inflation forecast for next year from 7 percent to 8 percent and said, “While creating medium-term forecasts, it is assumed that fiscal policy measures, together with other monetary and financial measures taken, will support the production potential of the economy during the epidemic process and contribute to the recovery after the epidemic.” “We also assumed that administered price and tax adjustments would be determined largely in line with the path of decline in inflation.” he said.
Pointing out that under the current monetary policy stance and strong policy coordination, they predict that inflation will gradually converge to the targets, Uysal continued as follows:
“In this context, we estimate that inflation will be 8.9 percent at the end of 2020, and will stabilize at 5 percent in the medium term after decreasing to 6.2 percent at the end of 2021. With a 70 percent probability, the midpoint of inflation will be 8.9 percent at the end of 2020.” “We predict that it will be between 6.9 percent and 10.9 percent, and at the end of 2021, it will be between 3.9 percent and 8.5 percent, with a midpoint of 6.2 percent.”
