Inflation and a weak lira – instability triggers for the Turkish economy

Inflation and a weak lira

Inflation is a weak aspect of Turkey’s macroeconomic performance and in 2018 is also considered to be a threat to its stability. Moreover, the salient impairment of price stability is also generated by the depreciation of the Turkish lira against dollar, facts which outline the flawed underpinning of the central bank and government. Given the fact that 2019 is an electoral year in Turkey, public finance and the other economic policies are traditionally meant to offer incentives in order to increase population’s welfare. Therefore, quantitative easing measures instead of tightening policies only deepen the distress regarding price and exchange rate instability.

First of all, the primary objective of the Central Bank of the Republic of Turkey (CBRT) is to maintain price stability; there is an inflation target quantified through the Consumer Price Index (CPI) set at 5% since 2012, with a band of variance of 2 points above or below. However, the inflation rate has been alarmingly increasing in the last few years, with a peak value of 12.2%, according to Bloomberg[1].

According to the Inflation Report of April 2018 published by the Central Bank of Turkey, ‘’consumer inflation fell by 1.69 points quarter-on-quarter to 10.23 percent in the first quarter of 2018”. The main contributions to CPI belong to core goods, food, services, energy; the evolution of food, energy, core goods prices in the first quarter of 2018 revealed stagnation or a slight downward trend. The inflation pressures have come from services(tourism) and electricity.

Currently, the inflation level is even higher and inflation expectations continue to pose risks to pricing behaviour. Cost-push inflationary pressures on the Turkish economy are accompanied by portfolio outflows as a risk scenario, and stated that the extent of the pass-through from rising exchange rates to consumer prices and the potential impact on overall financial stability will shape the monetary policy response.

Against this background, CBRT decided to implement a strong monetary tightening to support price stability. Accordingly, the Late Liquidity Window lending rate was raised from 13.5 to 16.5 percent. The tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement and becomes consistent with the targets. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored, and, if needed, further monetary tightening will be delivered. [2]

In practice, the economic development of Turkey proved that the country is still resilient to strong shocks, even after the terrorist attacks occurred in 2015 on Istanbul Atatürk Airport. Surprisingly, Turkey’s recovery after such debacle is unprecedented and it is claimed that ‘’instability and terrorism have little impact on private consumption’’[3].

In addition to the high inflation level, the strength of the Turkish lira is questionable nowadays, as you can see in the graph below.

 

The USD TRY parity  increased 0.0225 or 0.49% to 4.6200 on Wednesday June 6 from 4.5975 in the previous trading session, getting close to the all time high maximum of 4.71 in May 2018.

 

The central bank, which had been scheduled to hold its next policy-setting meeting on June 7, said it had increased its top interest rate to 16.5 percent from 13.5 percent, which is contrary to the presidential actions, which are considered the ‘’enemy of interest rates’’.

From a different point of view, Borsa Istanbul stock exchange regards speculative attacks as the reason for lira’s depreciation, especially in the light of the upcoming elections.

However, the general perspective is that the lax or unreal economic policy led to the predicament of the Turkish lira and to the two-digits inflation rate. Even though the GDP annual growth rate recorded a 7.3% level, Turkish development is underpinned on borrowing, whereas the savings rate is low and the current account deficit is high.

Unemployment, public debt, high inflation, lira depreciation are sensitive aspects regarding Turkey’s economic development. A strong communication channel is required between the central bank and the government in order to pursue the stability objective of CBRT and restore investors’ confidence.

 

[1] https://www.bloomberg.com/news/articles/2018-06-04/turkish-inflation-accelerates-more-than-expected-on-weak-lira, 
accessed at 06.06.2018

[2]http://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Announcements/Press+Releases/2018/ANO2018-22, 
Press Release Summary of the Monetary Policy Committee Meeting, accessed at 04.06.2018

[3] https://hbr.org/2016/07/the-real-challenge-to-turkeys-economy-isnt-terrorism, accessed at 04.06.2018

 

 

Irina Badea, PhD

University of Craiova, Romania

 

 

 

 

 

Central Bank of the Republic of Turkeyinflationinternational tradeintradersweak lira
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