briefing on 2020-i inflation report
TRANSCRIPT
Briefing on 2020-I Inflation Report
January 30, 2020 ANKARA
January 2020 Inflation Report: Main Sections
2
Overview
International Economic Developments
Inflation Developments
Supply and Demand Developments
Financial Conditions and Monetary Policy
Public Finance
Medium Term Projections
January 2020 Inflation Report: Boxes
3
A Closer Look at Global Trade Interventions
Main Macro Drivers of the Disinflation in 2019
An Analysis of Turkish Firms’ Cost Structure
Nowcasting for Labor Market Data
Exchange Rate Pass-Through to Export Prices
The Direct and Indirect Effect of Credit Market Conditions on Investment: Evidence from a Reversal in International Capital Flows
Effects of Macroeconomic Indicators on Turkey’s Risk Premium
An Evaluation of End-2019 Inflation Forecasts
10-Year Bond Rates (%)
Source: Bloomberg Source: EPFR
Global Economic Outlook
4
Portfolio Flows to Emerging Economies (4-Week Cumulative, Billion USD)
Current global financial conditions and the recent partial improvement in expectations regarding global trade support the demand for emerging market assets and the risk appetite.
Possible effects of protectionism, other uncertainties pertaining to global economic policies, and geopolitical developments are closely monitored.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
01
.14
07
.14
01
.15
07
.15
01
.16
07
.16
01
.17
07
.17
01
.18
07
.18
01
.19
07
.19
01
.20
Germany United States United Kingdom Japan
-40
-30
-20
-10
0
10
20
30
40
07
.15
01
.16
07
.16
01
.17
07
.17
01
.18
07
.18
01
.19
07
.19
01
.20
Equity Funds Bond Funds
5
Domestic Economic Outlook
Turkey’s country risk premium declined significantly due to improvement in macroeconomic indicators and global developments.
Wide-spread improvement in inflation expectations and increased consensus among individual expectations indicate that uncertainties regarding the medium-term inflation outlook have decreased to a large extent.
Due to improvement in inflation expectations and decline in the country risk premium, long-term interest rates fall, domestic demand strengthens, investment tendency and labor markets display signs of recovery.
While favorable effects of improved competitiveness prevail, weakening global economic outlook tempers external demand. The contribution of net exports to economic growth declines with changing demand composition.
Developments in the exchange rate, domestic demand conditions and producer prices have contributed to a mild underlying trend in inflation indicators.
Looking forward, on the back of the disinflation process and improvement in financial conditions, recovery in economic activity and the labor market is expected to continue.
The risks arising from uncertainties regarding the global economy to macroeconomic indicators through capital flows, international trade and commodity prices are closely monitored.
Monetary Policy and Financial Conditions
Short-Term Interest Rates (%)
Source: BIST, CBRT Source: Bloomberg
Monetary Policy
7
Yield Curve on Government Bonds (%)
One week repo rate was reduced to 11.25 percent with a measured cut based on the improvement in the inflation outlook; and the yield curvefor government bonds shifted down across all maturities compared to the previous Report.
6
8
10
12
14
16
18
20
22
24
26
01
.18
04
.18
07
.18
10
.18
01
.19
04
.19
07
.19
10
.19
01
.20
Interest Rate Corridor
CBRT Average Funding Rate
Average Interest Rate at BIST excluding the CBRT
1 Week Repo Rate
9
10
11
12
13
14
0
12
24
36
48
60
72
84
96
10
8
12
0
Maturity (Month)
31 October 2019
31 October 2019-27 January 2020 Average
27 January 2020
Inflation Expectations (%)
Source: CBRT Source: CBRT
Inflation Expectations
8
Distribution of Inflation Expectations (12 Months)
While improvement in inflation expectations continues, increased consensus among survey participants indicates wide-spread decline in expectations.
5
7
9
11
13
15
17
19
01
.14
07
.14
01
.15
07
.15
01
.16
07
.16
01
.17
07
.17
01
.18
07
.18
01
.19
07
.19
01
.20
12 months 24 months 5 Years 10 Years
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
6 8 10 12 14 16 18 20
July 2019 December 2019 January 2020
Bond Yields (%) and Inflation Compensation (5-Day Moving Average, %)
Source: Bloomberg Source: Bloomberg
Monetary Conditions
9
Implied FX Volatility (1 Month, %)
Due to improvement in inflation expectations and decline in the country risk premium, long-term interest rates fell. The volatility of Turkish lira declined.
* Emerging economies include Brazil , Chile , Colombia , Mexico , Poland, Philippines , Malaysia , S. Africa , Indonesia , Romania and Hungary.
6
10
14
18
22
26
30
01
.18
04
.18
07
.18
10
.18
01
.19
04
.19
07
.19
10
.19
01
.20
10-Year Inflation Compensation 10-Year Bond Yield
2-Year Inflation Compensation 2-Year Bond Yield
0
15
30
45
60
75
01
.18
04
.18
07
.18
10
.18
01
.19
04
.19
07
.19
10
.19
01
.20
Emerging Economies*
Turkey
Consumer Loan Rates (Flow Data, Annual, 4-Week Moving Average, %)
Source: CBRT Source: CBRT
Financial Conditions
10
Annual Credit Growth (Adjusted for Exchange Rate, %)
While loan rates have decreased significantly, credit growth has accelerated.
10
15
20
25
30
35
40
02
.18
04
.18
06
.18
08
.18
10
.18
12
.18
02
.19
04
.19
06
.19
08
.19
10
.19
12
.19
Consumer Personal Housing Automobile
-6
0
6
12
18
24
01
.16
04
.16
07
.16
10
.16
01
.17
04
.17
07
.17
10
.17
01
.18
04
.18
07
.18
10
.18
01
.19
04
.19
07
.19
10
.19
01
.20
Commercial Consumer Total
Macroeconomic Developments andMain Assumptions
Consumer Inflation* (%)
Source: CBRT, TURKSTAT Source: CBRT, TURKSTAT
* Shaded region indicates the 70 percent confidence interval for the forecast.
October 2019 Inflation Report Forecasts and Realizations
12
Inflation Excluding Unprocessed Food, Energy, Alcoholic Beverages, Tobacco Products and Gold* (%)
Annual inflation was in line with the October Inflation Report forecasts in the last quarter of 2019.
6
10
14
18
22
12
.18
01
.19
02
.19
03
.19
04
.19
05
.19
06
.19
07
.19
08
.19
09
.19
10
.19
11
.19
12
.19
October IR Forecast Realization
6
10
14
18
22
12
.18
01
.19
02
.19
03
.19
04
.19
05
.19
06
.19
07
.19
08
.19
09
.19
10
.19
11
.19
12
.19
October IR Forecast Realization
CPI Sub-Groups (Annual % Change)
Source: TURKSTAT Source: CBRT, TURKSTAT
Inflation
13
CPI Diffusion Index, B Index and Median Inflation* (Seasonally-Adjusted 3-Month Average)
Annual inflation increased owing to base effects. Trends of inflation indicators followed a mild course as a result of developments in the exchange rate, domestic demand conditions and producer prices.
*Diffusion Index: Ratio of the number of items with increasing prices minus the number of items with decreasing prices to total number of items within a given month.
Median Inflation: Median monthly inflation of seasonally-adjusted 5-digit sub-indices.
B Index: Seasonally adjusted, annualized, 3-month moving average, percentage change.
0
10
20
30
40
12
.15
06
.16
12
.16
06
.17
12
.17
06
.18
12
.18
06
.19
12
.19
Core Goods Services Food Energy
0
10
20
30
40
50
60
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
12
.15
06
.16
12
.16
06
.17
12
.17
06
.18
12
.18
06
.19
12
.19
CPI Diffusion Index (left axis)B (Adjusted for Tax Changes)Median (Annualized)
Contribution to Annual Growth from the Expenditure Side (% Points)
Source: CBRT, TURKSTAT Source: TURKSTAT
Aggregate Demand
14
Industrial Production Index and Sectoral Confidence Indices** (Seasonally Adjusted)
Recovery in economic activity and improvement in its sectoral diffusion continue.
* Includes inventories and statistical discrepancy due to chain linking. ** As of October and November for industrial production, as of January for confidence indices.
- 16
- 12
- 8
- 4
0
4
8
12
16
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2015 2016 2017 2018 2019
Private Consumption Investments Net Exports
Public Consumption Change in Inventories* GDP
-6
-4
-2
0
2
4
6
30
45
60
75
90
105
120
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2015 2016 2017 2018 2019 20
Industrial Production Index (Quarterly % change, left axis)
Services Confidence Index
Construction Confidence Index
Investment Tendency and Labor Market
Source: TURKSTAT * As of OctoberSource: CBRT
Fixed Capital Investment Tendency by Firm Scale Based on BTS (Seasonally Adjusted, Balance, Next 12 Months)
Unemployment Rates (Seasonally Adjusted, %)
15
Tendency for investment is recovering, including small and medium-sized firms.
Unemployment rates start to decline as recovery in economic activity strengthens.
49
50
51
52
53
54
55
56
6
8
10
12
14
16
18
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4*
2014 2015 2016 2017 2018 2019
Labor Force Participation Rate
Unemployment Rate (left axis)
Non-Farm Unemployment Rate (left axis)
-20
-15
-10
-5
0
5
10
15
20
25
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2014 2015 2016 2017 2018 2019
Small Scale Medium Scale Large Scale
External Balance
Current Account Balance (CAB) (12-Month Cumulative, Billion USD)
Source: CBRT
16
Current account balance maintains its moderate course.
-80
-60
-40
-20
0
20
40
60
11
.11
11
.12
11
.13
11
.14
11
.15
11
.16
11
.17
11
.18
11
.19
CAB CAB (excl. gold) CAB (excl. energy and gold)
Revisions to Oil Price Assumptions* (USD/Barrel)
Source: Bloomberg, CBRT Source: Bloomberg, CBRT
Assumptions for External Variables
17
Revisions to Import Price Assumptions* (Index, 2010=100)
Assumptions regarding international crude oil prices and USD-denominated import prices were revised slightly upwards.
* Shaded area shows the forecast period.
20
40
60
80
100
01
.18
07
.18
01
.19
07
.19
01
.20
07
.20
Jan-20 Oct-19
Realization
80
85
90
95
100
12
.17
06
.18
12
.18
06
.19
12
.19
06
.20
12
.20
Jan-20 Oct-19
Realization
Revisions in Assumptions
18
October 2019 January 2020
Output Gap(Percent)
2019 Q3 -3.6 -3.7
2019 Q4 -3.2 -2.8
Export-Weighted Global Production Index(Average Annual Percent Change)
2019 1.96 1.85
2020 2.07 1.81
Oil Prices(Average, USD)
2019 63.4 64.0
2020 57.7 60.0
2021 56.2 56.6
Import Prices(USD, Average Annual Percent Change)
2019 -4.0 -4.1
2020 -2.3 -1.9
2021 - -0.4
Food Prices (End-year Percent Change)
2019 10.0 10.9
2020 11.0 11.0
2021 7.0 7.0
Inflation and Output Gap Forecasts* (%)
Source: CBRT, TURKSTAT
Inflation Outlook
19* Shaded region indicates the 70 percent confidence interval for the forecast.
Under a tight monetary policy stance and strong policy coordination focused on bringing inflation down, inflation is projected to converge to the target gradually.
Inflation is projected to be 8.2% at end-2020, 5.4% at end-2021, and stabilize around 5% in the medium term.
Accordingly, inflation is expected to be
between 6.2% and 10.2% (with a mid-point of 8.2%) at end-2020
between 3.0% and 7.8% (with a mid-point of 5.4%) at end-2021
with 70% probability.-6
-2
2
6
10
14
18
22
12
.18
03
.19
06
.19
09
.19
12
.19
03
.20
06
.20
09
.20
12
.20
03
.21
06
.21
09
.21
12
.21
03
.22
06
.22
09
.22
12
.22
Forecast Range Uncertainty BandInflation Targets Output GapYear-end Inflation Forecast (Mid-point)
Control Horizon
Inflation and Output Gap Forecasts* (%)
Source: CBRT, TURKSTAT
Inflation Outlook
20* Shaded region indicates the 70 percent confidence interval for the forecast.
Upward effects on the 2020 year-end inflation forecasts:
+0.1 point from upward revision in assumptions for oil prices,
+0.1 point from upward revision to output gap,
+0.2 points from the rise in unit labor costs.
Downward effects on the 2020 year-end inflation forecasts:
-0.2 points from the improvement in the underlying trend of inflation,
-0.2 points from tax adjustments.
2020 year-end inflation forecast remained unchanged, as the downward and upward effects balanced out.
2021 year-end inflation forecast remained intact as well at 5.4%.
-6
-2
2
6
10
14
18
22
12
.18
03
.19
06
.19
09
.19
12
.19
03
.20
06
.20
09
.20
12
.20
03
.21
06
.21
09
.21
12
.21
03
.22
06
.22
09
.22
12
.22
Forecast Range Uncertainty BandInflation Targets Output GapYear-end Inflation Forecast (Mid-point)
Control Horizon
Briefing on 2020-I Inflation Report
January 30, 2020 ANKARA