The Kapali Carsi

Themes around Turkish inflation and monetary policy

There were three important inflation developments this past week, and strangely enough, Friday’s actual inflation turnout was the least interesting one. 

This is the intro. to my Hurriyet Daily News column on inflation developments from last month. You can read the whole column here.

I would be doing a rather good job as a columnist if my columns had some shelf life, and if a column on a new data release is still readable after nearly two months, it would mean I have done an excellent job:) And I did not even do such a good job in forecasting:

As you can see, the January foul weather did not take its toll on food inflation too much, and as a result, inflation may have actually peaked in January, even though it is still in double-digit territory.

But the general points I make in the column are still valid. For one thing, the weak lira is making inflation challenging. In that sense, the FT was right on target when it noted that Turkish inflation was at the mercy of the lira. It is therefore interesting to note that the lira has been starting to creep up again of late…

… which partly reflects global developments, but it has been underperforming other EM currencies as well, highlighting the beta nature of Turkish assets. So it will be interesting to see how the CBT reacts to this new weakness. Note that the Bank did tighten liquidity a bit of late…

But more importantly, I disagree with the Central Bank on several key concepts. For example, as I note in the column, the Central Bank continues to see low growth as the biggest risk to the Turkish economy. They don’t see the external vulnerability I mention in the column as a major risk because they are confident capital flows to EMs will be abundant this year. They may be right, but just think how US rates reacted to the Fed announcement, which some interpreted as “no QE3”. As I will argue in a later post in more detail, I think it is a big gamble to tie your country’s fortunes to global risk appetite.

Finally, some Turkish monetary gossip: The head of research and stats departments at the Central Bank traded places last week, with Hakan Kara, the previous head of research being appointed chief economist of the Bank two days later. Why does this matter? While he was one of the architects of the Bank’s new and unconventional “inflation targeting plus”, I was hearing that he did not agree on all the details with Mehmet Yorukoglu, the Deputy Governor in charge of research- with Kara going for more traditional economics. So I interpreted this development as the Bank becoming an even less inflation targeter, or even not an inflation targeter at all, as I mention in the column…

As for the change to weights (of the CPI basket) I mention in the column: Nothing alarming so far, but I would still argue that the Turkish Statistical Office did a really bad publicity by not announcing their methodology. Of course, the example of Argentina comes to mind. While Turkey is nowhere near that stage, my lesson from the gauchos is that you can never be too careful with stats; otherwise, you may have people relying on third parties for inflation and even the Fund openly questioning your numbers

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