CBRT Sent an Inflation Letter to the Government

CBRT sent an inflation letter to the government. In the letter in question, issues of inflation target were discussed.

CBRT sent an "Open Letter" to the Minister of Treasury and Finance, Lütfi Elvan, on behalf of the government. In the letter, which drew attention to the fact that the inflation of the end of 2020 is above the target range, the reasons for the deviation of inflation from the target and the measures taken and to be taken to reach the target were discussed. In the letter, where the factors determining inflation in 2020 were explained, the evaluation of the measures taken to reach the target was included. The expressions used in the open letter were as follows: “It is expected that the slowing effects of the strong monetary tightening realized at the November and December Monetary Policy Committee (MPC) meetings on loans and domestic demand will become more evident, thus the demand and cost factors that have an impact on inflation will gradually weaken. It is estimated to be 9.4, to reach 7 percent at the end of 2022 and to stabilize by decreasing to the medium-term target of 5 percent at the end of 2023. The forecasts are produced under the assumption of a monetary tightness level that will keep inflation in line with the 2021 and 2022 forecast targets. In addition, it is based on an outlook in which there will not be a negative shock caused by an epidemic in the global growth and external demand outlook, and that the improvement in Turkish risk perceptions will continue with the positive developments in the global risk appetite. In the forecast path for 2021, wages, food prices and international commodity prices affect inflation upwards, while administered prices and inflation expectations affect inflation downwards. In this interaction, the strong effect of the tight monetary stance is expected to bring 2021 year-end inflation down to 9.4 percent. However, the upside risks on these forecasts remain significant. Therefore, it is imperative to maintain the strong tight monetary policy stance.”   “5 Percent Inflation Target Can Be Achieved in 2023” Reminding that the basic principles of the monetary policy to be implemented by the CBRT in line with the main objective of price stability are included in the Monetary and Exchange Rate Policy text announced on December 16, 2020, the letter continued as follows: “In this context, the forecasts shared in the Inflation Reports are at the same time an 'forecast target' and an intermediate target by creating a reference to inflation expectations. In other words, it will be a reference for economic units in terms of the future course of inflation in order to manage expectations more effectively while converging to the medium term inflation target. The value is inflation forecasts in the short term and the inflation target in the medium term When the current levels of inflation are evaluated together with the upside risks, it is obvious that it is far from the 5 percent target. The estimates we provide in the January Inflation Report show that we can reach the 5 percent inflation target in 2023. Therefore, the tight and cautious stance in monetary policy should be resolutely maintained until 2023, when the 5 percent target is expected to be reached. In order to reach the medium-term 5 percent target, the inflation targeting regime will be implemented with all its elements. In this process, the development of inflation within the projected forecast path will be monitored continuously and closely. The level between the expected and expected inflation rate path and the monetary policy interest rate path will be established by considering a strong disinflationary balance until it reaches the 5 percent target and this balance will be maintained continuously.”   In Case of a Risk, Additional Tightening Will Be Done With Determination In the open letter, it was underlined that if any new data to be obtained besides the existing data indicates the risk of deviating from the medium-term target path in inflation expectations and pricing behavior, additional tightening will be done ahead and with determination. Accordingly, the letter emphasizing that the underlying trend of inflation and the indicators related to pricing behavior, diffusion indices, demand and cost factors and inflation expectations will be closely monitored with their targets within the forecast horizon, said: “This situation will positively affect macroeconomic and financial stability, while also allowing the tightness of monetary policy to be adjusted under these conditions.” The letter emphasized that the fiscal consolidation, which will be achieved by strengthening the coordination between monetary and fiscal policy within the framework of strong policy coordination, will provide a very important input in reaching the inflation targets in reaching the medium-term 5 percent target. “In addition to the fiscal stance, managed/directed price and tax adjustments, determination of incomes policy and public borrowing strategy in line with the monetary policy targets will support our fight against inflation. Moreover, the reform steps to be taken in the field of law and economy will provide an important support to the disinflation process through expectations. Continuing structural steps to reduce rigidity and volatility will positively contribute to price stability and thus social welfare In this context, the CBRT will continue to analyze structural elements, develop policy recommendations, and raise awareness among relevant stakeholders and the public about the importance of combating inflation. On the other hand, steps will also be taken to improve confidence in monetary policy by increasing and developing transparency, predictability and accountability in the design and implementation of monetary policy. As a result, in line with the goal of achieving price stability, the Central Bank will continue to use all of its tools in a full, timely, effective, powerful and determined manner.” In addition, it was stated in the letter that it is essential that all layers of the society focus on the goal of price stability, believe this, and that decision-makers and policy makers take decisive steps in this direction: “Within this framework, an open, sincere and effective cooperation and communication policy will be implemented in order to transform the process of combating inflation into a process owned by all parties.”     This article has contributions of AA.