Professor of the Department of Economics at the University of Koç. Dr. Demiralp Jungle, President and President of the AKP Recep Tayyip Erdoganit evaluated the package of economic reforms announced on Friday. Demiralp, “The establishment of a ‘price stability committee’ within the scope of the reform program raises my concerns” expressed his opinion.
Below is a portion of the article Demiralp wrote in the Yetkin Report.
On Friday, March 12, President Erdogan announced the Economic Reform Package. As an economist working on monetary policy, the most striking statement that you are trying to understand is:
“They say price stability every two, or we put it aside. The new period will be built on four foundations. Investment, employment, production, export. To do this, we are implementing new policies that cover issues such as spending discipline, public debt management, tax regulations, public procurement auctions. “
This statement can be interpreted completely opposite to each other:
1) The constant emphasis of experts on price stability has increased our awareness and sensitivity as policy makers. We do not even believe that it is necessary to continue talking about this. It is true that inflation targeting has not been successful and price stability has not been achieved so far. However, in the coming period, as the new Central Bank Governor Naci Ağbal constantly emphasizes, we will be determined to reach the inflation target of 5 percent.
2) There are more important issues on our agenda than price stability. To date, price stability has not been a priority for us. It won’t happen after that either. Short-term and growth-oriented policies will be our choice from now on. We will therefore return to the priorities adopted in the pre-Naci Ağbal period.
It is difficult to predict exactly which of these comments the President meant by “neglecting price stability.” The markets will try to understand this in the coming days like me. At this point, the significance of the March 18 PPK meeting becomes even more important.
The recent rise in US bond yields and the outflow of money from developing countries has weakened the currencies of these countries. The Turkish lira differed negatively from the currencies of other developing countries. It became the currency that lost the most value in the period after February. Because, in addition to unproven economic management whose long-term determination is not exactly known, concerns created by current vulnerabilities have increased our risks. The point we have reached has revealed how fragile the balances established in the post-Agbal period can be.
The depreciation of the LT also increases the policy rate, necessary to maintain price stability, due to the pass-through of the exchange rate to inflation. At this point, a vicious cycle begins to feed off each other. As the TL depreciates, inflation increases. It is expected to rise further in the future as inflation rises. With this expectation, the exchange rate loses more value. Ultimately, the CBRT can achieve its year-end goals only with an aggressive stance, with further increases in interest rates.
With the aim of breaking this vicious circle in recent weeks, Naci Ağbal, director of the CBRT, Article He once again emphasized price stability and expressed his determination to reach the 5 percent target. Ağbal’s emphasis was aimed at limiting the deterioration in inflation expectations. Probably underlying this increase was the effort of a central bank, which had to raise interest rates during the pandemic, to complete the path with the least damage and the least increase in interest rates.
Verbal cues must be a credible threat to be effective. If the markets are confident that the CBRT will use the interest rate weapon as it wishes, if inflation expectations do not decrease, then it is possible to lower expectations before the interest rate rises. Ağbal played this hand relying on the credibility of the 675 basis point interest rate increase he made during his 5-month tenure. If the wind blowing from the US does not get stronger, there is a chance that this hand will be successful. However, statements on Friday further weakened this possibility.
Complete article here.