The CBRT announced the last inflation report of the year on Thursday last week. It raised its end-2024 inflation forecast by three points to 36 percent. In TEPAV’s Economic Outlook Report published in September, this value was estimated at 39 percent, and in the IMF assessment published in early October, it was estimated at 46 percent.
After the elections, it was announced that an economic program symbolizing a return to rationality would be implemented. Within this framework, measures were taken to reduce the budget deficit, which was expected to reach very high levels. A series of decisions destabilizing financial stability were reversed. The CBRT management changed. The gradual tightening of monetary policy began. Some regulations were introduced to get rid of the scourge of Currency Protected Deposits. All are steps in the right direction.
However, the 5 percent inflation target, which has long ceased to have any meaning, has not been changed. This is an important mistake. If there was a credible target, changing it so frequently would obviously destroy that credibility. It may be that uncontrollable developments – for example, a sharp increase in crude oil prices – have led to a temporary deviation from the target. For this reason alone, of course, you do not change the target; you raise your inflation forecast. After a while, you announce that, thanks to the policy you have implemented, inflation will start to follow a path consistent with the target again.
However, there is currently no inflation target. On the CBRT website, the target has been 5 percent since 2012. And not just ‘since’, but also for 2024 and 2025. But what has happened in between? Year-end inflation in double digits since 2017. It was 36 percent in 2021 and 64 percent in 2022. The end-2023 CBRT forecast is 65 percent. But the target is always 5 percent.
Why set an inflation target? To be a beacon that reduces uncertainty about the future. To serve as an anchor in forward purchases, lending and borrowing contracts, and wage negotiations. But when the target is set at 5 percent despite such high inflation, the target becomes meaningless. One might say that “that is a target for the future”; that is true, but that is the problem. At the end of 2024 or 2025, which target will monetary policy be shaped according to? Probably not according to 5 percent.
This is where the CBRT’s inflation forecast comes into play. If there is a target for the future, but there is no announced target for the near future – as is the case now – the CBRT’s inflation forecast serves as an intermediate target. Or rather, I thought so, and so did other economists close to the subject. However, that forecast has changed. So, the end-2024 forecast is not an interim target. In this case, what is the end-2024 target? What is the end-2025 target? According to what will the price and wage increases and interest rates agreed in contracts be shaped? It would be useful for the economic administration to put the target issue on the agenda.
