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Briefing on 2020-I Inflation Report January 30, 2020 ANKARA

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Page 1: Briefing on 2020-I Inflation Report

Briefing on 2020-I Inflation Report

January 30, 2020 ANKARA

Page 2: Briefing on 2020-I Inflation Report

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

Page 3: Briefing on 2020-I Inflation Report

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

Page 4: Briefing on 2020-I Inflation Report

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

Page 5: Briefing on 2020-I Inflation Report

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.

Page 6: Briefing on 2020-I Inflation Report

Monetary Policy and Financial Conditions

Page 7: Briefing on 2020-I Inflation Report

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

Page 8: Briefing on 2020-I Inflation Report

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

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07

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01

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07

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01

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01

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07

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01

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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

Page 9: Briefing on 2020-I Inflation Report

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

Page 10: Briefing on 2020-I Inflation Report

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

Page 11: Briefing on 2020-I Inflation Report

Macroeconomic Developments andMain Assumptions

Page 12: Briefing on 2020-I Inflation Report

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

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01

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05

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06

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08

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09

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10

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11

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October IR Forecast Realization

6

10

14

18

22

12

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01

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02

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03

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04

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05

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06

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October IR Forecast Realization

Page 13: Briefing on 2020-I Inflation Report

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

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06

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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

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12

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06

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12

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06

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12

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CPI Diffusion Index (left axis)B (Adjusted for Tax Changes)Median (Annualized)

Page 14: Briefing on 2020-I Inflation Report

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

Page 15: Briefing on 2020-I Inflation Report

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

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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

Page 16: Briefing on 2020-I Inflation Report

External Balance

Current Account Balance (CAB) (12-Month Cumulative, Billion USD)

Source: CBRT

16

Current account balance maintains its moderate course.

-80

-60

-40

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0

20

40

60

11

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11

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CAB CAB (excl. gold) CAB (excl. energy and gold)

Page 17: Briefing on 2020-I Inflation Report

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

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01

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07

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07

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Jan-20 Oct-19

Realization

80

85

90

95

100

12

.17

06

.18

12

.18

06

.19

12

.19

06

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12

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Jan-20 Oct-19

Realization

Page 18: Briefing on 2020-I Inflation Report

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

Page 19: Briefing on 2020-I Inflation Report

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

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Forecast Range Uncertainty BandInflation Targets Output GapYear-end Inflation Forecast (Mid-point)

Control Horizon

Page 20: Briefing on 2020-I Inflation Report

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

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6

10

14

18

22

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09

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12

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03

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.22

Forecast Range Uncertainty BandInflation Targets Output GapYear-end Inflation Forecast (Mid-point)

Control Horizon

Page 21: Briefing on 2020-I Inflation Report

Briefing on 2020-I Inflation Report

January 30, 2020 ANKARA