‘Peak’ period for inflation and interest

‘Peak’ period for inflation and interest

We are only now starting to see the economic effects of what happened prior to the June 24 elections. The June inflation rate, which will be announced today, is expected to stand at 1.4 percent, whereas the consumer price index is expected to see a 14 percent rise on a yearly basis.

As of this week, we will again start to hear the words of “peak,” “bottom,” and “record,” which are often used in the financial press quite frequently. The 14 percent annual inflation rate will be the highest number reached, or “peak,” since the year 2003. However, will this inflation rate increase in the upcoming months? The market expectation is that this rate will be higher at the end of July. Even if the July figure is not higher due to an adjustment, the inflation rate is expected to hit new “peak” figures in a couple of months.

The levels of a trend at the end of year or the beginning of a new year are important. We can say the markets predict the inflation rate will continue to increase at the end of 2018.

Market analysts expect the annual consumer price index to stand at 12-13 percent at the end of this year. However, it should be indicated that at the middle of the year, market analysts usually make optimistic forecasts of end-of-year inflation rates. Of course, what will happen the rest of the year will be very important, but I do not think it would be surprising to see an inflation rate of 15 percent at the end of the year.

This is because I believe tax regulations and administrative price increases needed for the restoration of balances will lead to an inflation rise, even though Finance Minister Naci Ağbal has said the government will take into account monetary policies while determining financial policies and that they have evaluated the latest tobacco tax regulation within this scope.

‘Peak’ for interest rates

Aside from that, it is clear foreign exchange rates will be a determining factor in upcoming inflation rates, as is the case with the current inflation rate. Prior to the elections, we have closely observed the effect belated steps regarding monetary policy decisions have had on foreign exchange rates. This means the management of the economy hereupon and whether it will give confidence to markets can be very determining for exchange rates. Therefore, having hit record levels, exchange rates will have a dominant role in year-end-inflation expectations.

It is an unchangeable reality that peaks in inflation have led to and will lead to peak levels in other rates. Besides, we have seen that when we have tried to change this reality, we have caused further peak levels in other rates. To a certain extent, it is possible to think of the levels Central Bank interest rates and interest rates on deposits and loan rates have reached within this scope.

Let’s remember that prior to the elections, the Central Bank had to make surprise increases on interest rates that were quite high. Depending on this, commercial banks are continuing to increase their interest rates on loans.

Interest rates on deposits started at the level of 15 percent last week and have increased up to 20 percent and this upward trend continues. Again, depending on this, loan rates now stand at 25 percent and over. Mortgage loan rates, which were lowered by artificial methods before the elections, now stand at around 15 percent.

The rules of the economy do not change prior to the elections or after. You pay the price for the wrong decisions you take. If you see the reality and push the mistake level to a minimum, the price becomes lower.

Erdal Sağlam, Turkish economy, Turkish Central Bank, Naci Ağbal