Bilkent University Faculty Member and former Central Bank Chief Economist Prof. Dr. Hakan Kara evaluated the Central Bank’s steps to combat inflation and its exchange rate policy.
Stating that the Central Bank’s inflation targets are very ambitious and that he is not convinced of these targets, Kara said:
“In my opinion, 36 percent for 2024 and 14 percent for 2025 are very ambitious. Of course, I respect it. The fact that the Central Bank does not change the forecasts also sends a message. The message is given that we will strive to achieve these forecasts and keep the monetary policy tight. But there is also a problem; The trail seems so far away that it doesn’t serve as an anchor.
Therefore, my first choice would be; If we do not change that path, then I think it would be much more effective if it were given with a very concrete tightening signal. For now, this has not been done. But there was something else in the report that stood out, something I haven’t seen in a long time. The monthly inflation path was given in a concrete way. This is a situation that increases predictability.
I want to ask this; What will happen in the last quarter and inflation will drop to 1.5 percent, something we have never experienced in recent years? “I think we are not convinced enough on this issue.”
CAN AN INTEREST RATE REDUCTION BE EXPECTED IN THE LAST QUARTER OF THE YEAR?
Prof. Dr. Pointing out that it is premature to talk about an interest rate cut because inflation dynamics have not improved, Kara said, “The Central Bank rightly does not want to talk about an interest rate cut. Because it is too early. Inflation dynamics have not improved yet. If inflation will drop to 1.5 percent at the end of the year, this will already happen in 2025.” This means that the target will be achieved. Then there is no reason for the interest rate not to decrease. Of course, I do not know if it will happen, but if it does, for example, we can expect an interest rate cut in the last quarter of the year.
45 percent interest might actually have been sufficient. But it is now being questioned due to a number of factors. I think the most important of these factors could have been acted upon a little earlier. “If the interest rate had been quickly increased to 30-35 percent after May-June, we would not be talking about 45 percent today.”
‘THE VERBAL GUIDANCES OF THE MOTIVES ARE NOT VERY EFFECTIVE’
Speaking to Mesele Economy, Kara stated that there are question marks in people’s minds about inflation data and continued his words as follows:
“In the public opinion, people are still questioning the inflation data, questioning the expectations, the experiences of the past two years are still warm. In such periods, the verbal guidance of the Central Bank is not very effective. They need to show it by doing. I think it would be beneficial for the Central Bank to tighten its monetary policy a little more in the second quarter of the year. Public opinion To convince, tightening is needed to put inflation on the disinflation path.
I don’t think there will be a big change in monetary policy. The PPK members of the past period are still there and continue the established order. It is difficult to say why a hawkish approach would be taken. Actually, when we looked at the meeting, it did not seem very hawkish. It just seemed to me like a team that could more easily take steps to combat inflation. From this point of view, I think we can look at the fight against inflation a little more easily. “
‘THERE IS A TREND CHANGE ON THE EXCHANGE SIDE’
Hakan Kara, who also criticized the Central Bank’s foreign exchange policies, said in summary:
“There is a trend change on the foreign exchange side. Of course, we should not say that there is a trend change in a month, but at least the move to accumulate reserves did not continue as in November and December. In fact, there was a loss of reserves. The main reason for this is the outlook that did not support the fight against inflation on the wage policy side after December.” Wage increases, budget deficit, managed and manipulated prices continued to be completely indexed to past inflation…
At that time, people looked at how inflation would drop to 36 percent. Everything is done at over 50 percent. Therefore, the atmosphere here has deteriorated on the foreign investor side. The second was the relaxation in deposit interest rates. It also affected the residents greatly. People have moved away from TL a bit. Will this continue? I think it won’t be as much as it was in January. The change of new chairman turned the investors’ mood into a slightly positive one. In addition, the Central Bank is taking precautions and trying to increase deposit interest rates. Maybe there will be no foreign exchange accumulation until the election, but I think the Central Bank will accumulate foreign currency after March.
This is not a normal thing…
Exchange rate policy needs to be a little more transparent. It is clear that a floating exchange rate regime is not currently implemented. The Central Bank manages its reserves according to dollarization and tries to ensure that the exchange rate goes down a path. While we have the highest and most volatile inflation of all developing countries, our exchange rate volatility is the lowest. This is not a normal thing. While this picture is obvious, it is not possible to say that we are in a floating regime exchange rate. It would be beneficial for MB to be a little more sincere on this issue. What we call monetary policy is not only interest policy, it is also supported by exchange rate policy. On the one hand, managing the exchange rate like this creates the perception among citizens that it will explode if we let it go. I think that the Central Bank will gradually switch to floating exchange rates in the future. But I am not sure if we can switch to a fully floating exchange rate as before 2018. Because they have seen some benefits of the current exchange rate policy, they will not want to abandon it.
‘MAKING TL LOSE VALUE…’
They are no longer trying to stop the exchange rate completely. They are trying to keep it slightly below monthly inflation. Exporters do not want to disrupt the competitive balance. I don’t think the TL should lose value just because there are problems in certain sectors. Because there is an anti-inflation program, we need to continue it. It is necessary to solve the problems that occur on a sectoral basis in the background with more micro measures.
After a period in which the Turkish Lira loses value, an inflation of 5 points immediately occurs. Why so? Because in the high inflation environment and due to the applied exchange rate regime, foreign exchange is always going up. So when there is a movement in the dollar exchange rate, everyone thinks that this will be permanent. Now, every exchange rate movement is perceived as permanent and is immediately reflected in prices. Since there is no anchor for inflation, that is, there is no confidence in the targets, the exchange rate becomes the reference for price makers. The solution to this is to reduce inflation. But we’re still not there. “We need to have a lot of patience.”