I got so many questions about inflation, high cost of living and interest rates yesterday while I was live on TV100, I felt the need to tackle this issue again before this week ends.
As I said earlier this week, I take a good look at the data by Istanbul Chamber of Commerce (ICC) every month before the inflation rates are released. The reason why I do that is because ICC’s figures usually turn out to be the same with the statistics presented by TurkStat over the long term. For years now, retail prices data released by ICC helps me guess beforehand whether TurkStat’s inflation data will come in positive or negative.
The fact that May data released by the ICC turned out to be higher than 2% has sadly worsened double digit inflation rate for Istanbul. I thought, based on the numbers released by the ICC that TurkStat data too would turn out to be higher than expected, but fortunately, it didn’t. The figures announced by TurkStat are not to be underestimated either. This 1.36% inflation rate caused CPI increase to hit double digit just like the numbers announced by the ICC led to a double-digit inflation rate in Istanbul.
As I always say, it’s not possible to ensure a permanent decline in CPI increase unless core inflation goes down. We’ve seen core inflation reach double digits on a yearly basis in May 2020 when compared to the last month’s data. The fact that the price of goods and services we have to buy every month keeps rising, in seasonally adjusted terms, shows us that we will need to be more careful for the future.
“Now, it’s CBRT’s turn to speak up…”
Last month, Turkish Central Bank had announced that it lowered its core inflation target to 7.4% last month. According to current figures, inflation rate must turn out to be lower than 0.4% for the rest of the year, in order for the Bank can achieve its goal. If inflation rate comes in higher than 0.40% in a random month, we must have negative inflation in the next couple of months so as to reach the target.
Why is inflation target so important to the CBRT? Well, because CBRT implements its rate cuts in accordance with the results of this inflation target. Unfortunately, inflation rate in May 2020 poses the risk for the inflation target to go off track. So, if CBRT fails to take into account expectations in financial markets when deciding on its next rate cut, this might lead to deterioration.
My expectation is that the CBRT Chair and his team will listen to wise experts and accordingly cut rate by a maximum of 50 basis points in its meeting of June 25.
As I have repeated numerous times before, CBRT must choose its next steps wisely, and I trust its members to do so.