An inflation report not about inflation
Of course, I am being sarcastic. The Central Bank of Turkey’s latest inflation report, which was introduced yesterday by Governor Erdem Başçı, was naturally true to its name.
For one thing, the bank revised its end-year inflation forecast to 7.4 from 6.2 percent, mainly because of the recent tax and administrative price hikes as well as higher commodity prices. Similarly, the end-2013 projection was adjusted to 5.3 percent from 5.1 percent. These revisions were expected, as they had appeared in the government’s Medium-Term Program (MTP) on Oct. 9.
However, a significant part of the report, including a few must-read boxes on current economic matters, was not directly related to inflation. Başçı’s speech and Q&A session afterward was about much more than inflation as well. I think the governor did a great job in communicating these other points. However, cracks started to appear whenever he mentioned the i-word.
Başçı referred to a well-known paper by Harvard economist Robert Barro when a journalist asked him why he labeled the period from 1974 to 2003 as “30 lost years.” Barro found that every 10 percent of inflation steals 0.25 percentage points from growth. However, had the bank met its targets since 2005, the cumulative price increase since then would have been 52 rather than 82 percent!
For a moment, I forgot that he was actually the governor when he noted that the three main determinants of growth in the medium and long run are price and financial stability and productivity-enhancing structural reforms. After all, while I agree with him that bringing inflation to single digits has been a big step in Turkey’s never-ending struggle with price increases, he is the head of a central bank that has been missing its inflation targets for the past few years.
Even worse, your targets will not be taken seriously if you start missing them all the time. Citi Turkey economists show in a recent research note that the bank’s targets have not been a determining factor in the formation of inflation expectations since March 2011. They also demonstrate that expectations have settled at a level that is well above the bank’s 5.3 percent forecast for next year.
Başçı was not particularly successful when it came to explaining how inflation would fall that much. He underlined that even if food and energy inflation hovered around 7 percent, core inflation, which excludes these two factors, could drop to below 5 percent due to low demand as long the exchange rate was stable, keeping the headline figure at 5.3 percent.
Despite some recent signs of recovery, such as Oct. 23’s October capacity utilization and real sector confidence, no one expects strong growth next year. But I am not sure the MTP’s 4 percent projection is consistent with 5.3 percent inflation. The only thing that is obvious is that if the bank backs its words with deed, it won’t let the lira depreciate a lot next year.
We are lucky we have a Central Bank that offers such clear-cut investment advice.