Central Bank points out inflation risk

Central Bank points out inflation risk

Last Tuesday, the Central Bank’s Monetary Policy Committee decided to keep the key interest rate unchanged even though the bank is in a difficult position in terms of making a decision between controlling inflation and stimulating growth.

It seems that the committee chose to continue the tight monetary policies to control inflationary pressures. It must be remembered that both Turkish Central Bank Gov. Erdem Başcı and the previous governor, Durmuş Yılmaz, recently pointed out the inflation risk during back-to-back meetings in one week. Başcı said the Central Bank would continue to take necessary measures to maintain price stability, such as limiting the money supply to banks – something that has been implemented since last year.

Authorities in some Western countries have also begun to point out the probability of a new inflationary surge even as they continue to struggle with recession and unemployment problems. Naturally, they do not want to deflate modest increases in total demand by implementing further tight monetary and fiscal policies even though they are aware that the best remedy to fight inflation is exactly these policies.

Some prominent economists have also pointed out their concerns about a new inflation risk. Are their remarks only skeptical, or is their concern real? FED officials seem partly skeptical about the effect of the new initiatives. Nevertheless, it is understood that they may put a brake on monetary expansion if inflationary pressures rise. It means that they are also hesitant about the economic priorities: revival or stability.

On the other side of the, world, for example, the Chinese leadership is not hesitant. They think that rising inflation will hurt the economy. However, their remedy to stop the rise of inflation might not be as effective as they think. Historical cases show that price controls and price freezes generally create parallel markets that have resulted in higher prices than previous ones.

In short, there is not a sufficient amount of data showing a noticeable jump in inflation in many rich countries which still face recession and unemployment amid serious growing concerns about the inflation risk. For some people, this might not be the logical attitude, but for others who remember the post-war period, the story is quiet different. They witnessed several recessions which were overcome in a reasonably short period of time, whereas the inflationary period after the first oil shock lasted almost a quarter of a century.

Therefore, the authorities in the United States and in some European countries are carefully watching the results of the implementation of the stimulus packages. A rise in domestic (plus foreign) demand might give a push to production and employment but, at the same time, rising demand might raise the rate of inflation.

Now, what about Turkey? As mentioned before, during some meetings and conferences, Central Bank Gov. Başcı said the bank would continue implementing tight monetary policy until consumer price inflation is reduced to 5 percent. In fact, some data shows that the growth rate is slowing down and unemployment is slightly increasing. The ever-growing current account deficit is also another concern. However, the Central Bank seems determined to implement the necessary measures against a new surge in inflation.

The consumer price index increased by 0.56 percent in February; as a result, the annual rate came in at 10.43 percent, which was less than the three-year peak of 10.61 percent but was still quite high. Increasing oil prices and exchange rates will push the producer price index to higher levels which, in turn, will affect the consumer price index. The Central Bank governor made the necessary remarks and informed the markets that the bank would not change the monetary policies which have been implemented so far.

To summarize, the inflation risk is still there for every country, Turkey included. Our country has a bad record on inflation – both in how we created it and how we failed to stop it. This time, it is necessary to be more cautious. It is a big relief that all authorities who are responsible for economic affairs are aware of the inflation risk. Let us hope other authorities are also aware that political problems also affect the economy.