Central Bank still keeping inflation in mind

It has become obvious that the Turkish Central Bank is still keeping inflation in mind. With most of the attention focused on the recent decisions on interest and foreign exchange rates, it was not difficult to notice the somewhat hidden anxiety of the bank about the inflation risk. After announcing efforts to stop the rapid increase in consumer loans, an expected rise in inflation in the coming months was also mentioned. This activity indicates that the bank’s anxiety about inflation is real.

The deterioration in the global economic outlook and the emergence of new problems over the eurozone rescue plan could increase the probability of a slowdown in the economy beyond expectations and could create a new surge in foreign exchange rates. At first glance, these problems might seem more important than inflationary pressures. However, the final impacts of the two aforementioned external shocks on domestic prices might create more serious problems than a probable slowdown in growth and a sudden rise in foreign exchange rates.

Turkey experienced these difficulties several times after the 1950s. It must be remembered that if the fight against inflation is neglected because of other economic and political problems, prices will reach unbelievable levels, growth will drop to negative figures, foreign exchange reserves will disappear, foreign debt will balloon, reaching new external credit markets will become impossible, the forex bottleneck will stop all transactions and imports of energy and basic materials, industrial activity will stall for a long time, unemployment will increase rapidly and income distribution will deteriorate further – all within a short period of time. All these economic maladies will contribute, of course, to the emergence of new domestic political turmoil as seen even in many Western countries.

This is not the imaginary plot of a horror movie. In addition to Turkey, many emerging economies, especially in Latin America, have experienced this several times. Eastern European countries faced similar difficulties after World War II but did not declare economic data openly mainly because of their political regimes. Some Western European countries which face very serious deficit and debt problems naturally do not see inflation as a present threat. However, if an agreement on a sound eurozone rescue plan is reached and if the plan is successful in solving basic problems, the next step will surely be to look for another common plan to tackle the emergence of creeping inflation.

Rich countries who offered stimulus packages seemed at first quite indifferent to the risk of inflation and to the problems which huge budget deficits might create. Now, however, small notes have begun to come from both the European Central Bank and the Federal Reserve Bank expressing some concerns.

 The rich and developing countries together fostered for a long time the belief that higher growth rates and high rates of inflation always walked hand in hand. After a long period of stagflation, rich countries realized that inflation is the biggest economic problem to tackle. On the other hand, inflation-guided growth unfortunately became the effective fate for most developing countries. Will the world economy, the economies of both the rich and the developing countries, be able to return to reasonable growth rates without entering a new inflationary era? At present, it is not easy to answer the question. It is better first to wait to see what kind of rescue plan is prepared, how this plan is implemented and what the primary impacts of the plan will be.

To summarize, the inflation risk must not be neglected because of other serious economic problems. Looking at the remarks recently pronounced by the ECB and the FED, it is understood that the authorities in those institutions are aware of the problem and are ready to take action when the time comes. Fortunately, the same goes for Turkey’s Central Bank.

However, it is not easy to say the same for some developing countries; even the governments which are aware of the danger of rising inflation unfortunately do not have the courage to implement sound economic policies because of domestic political turmoil.