OPINION emre-deliveli

Death on the Nile

HDN | 6/26/2011 12:00:00 AM | Emre Deliveli - [email protected]

Someone should tell the Central Bank of Turkey that denial is not the name of a river that runs through Egypt.

Someone should tell the Central Bank of Turkey that denial is not the name of a river that runs through Egypt.

If not, it risks committing suicide, or rather murdering the Turkish economy, on denial. At least, that’s the conclusion I reached after reading the short statement accompanying Thursday’s rate decision.

For one thing, as the Central Bank runs out of ammunition to support its claim that the economy is not overheating, its arguments are looking more and more absurd. The bank’s stance on unemployment is the case-in-point.

For a long time, the Bank argued the high unemployment rate was proof the economy was not overheating, only to drop it when labor statistics suddenly improved considerably. However, unemployment made a surprising comeback last week.

According to the Central Bank, “employment conditions continue to improve, with unemployment rates back to the pre-crisis levels,” but “unit labor costs decline due to strong productivity gains.” However, a casual look at data reveals this is not the case, at least as of the end of the first quarter.

And I am not even talking about the logic of using a lagging indicator that is published two and a half months late and considered one of the least reliable of Turkish macro statistics as the basis of one of your main arguments.

Similarly, “the Committee has reiterated that, owing to the measures taken so far, the current account balance will start to improve in the final quarter of the year.” But it will start to improve owing to base-year effects in any case.

Despite a very qualified Research Department, the Central Bank is not providing sufficient proof to support their arguments. This could mean two things: The bank expects us to take what they say as Gospel. Or they simply cannot support their arguments. I hope it is the former.

Even more interestingly, the Central Bank seems not to be too worried about the recent bout of weakness of the Turkish Lira. This makes sense if you are targeting the current account deficit rather than inflation, but there are also valid economic justifications to be unconcerned about lira depreciation, as Royal Bank of Scotland’s Tim Ash summarizes in a recent research note.

It also matters why the lira is weakening, as I outlined in a recent blog post: I would not be too worried if it is the result of companies closing their open foreign currency positions rather than foreigners getting out because of political or economic worries. The Central Bank not only has much more staff than my team of three (me, myself and I), but it also has access to data before the public, so maybe they know something we don’t.

In any case, I think the recent comments by some Turkey economists that the Central Bank will soon respond to the lira weakness with rate hikes are unfounded. If anything, the bank will simply reduce, or eliminate altogether, its foreign currency purchase auctions. But at the end of the day, if the currency shoots up, pulling inflation along, the bank will have no choice but to respond with abrupt and large rate hikes, as was the case in June 2006.

Then, you won’t need a Hercule Poirot to figure out who murdered the Turkish economy.



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