Exchange rates… Why do they tend to drop lately…?

I have noticed that there is this contradiction between USD/TRY’s loose movements and benchmark rate. Although the recent calm on the foreign exchange market may seem like a good sign, it in fact shows a specific feature of floating exchange rate regime: “We can buy foreign currency if we have enough TRY”.

Accordingly, we will see whether the fact that people are not buying enough foreign currency due to low liquidity will bring negative impact on inflation over the upcoming periods. I cannot say that recent Government measures did receive worldwide acclaim but when I consider all those criticism I realize that people have been really confused about this.

A majority of them believe that inflation can be brought under control by means of higher interest rates and making growth slow down. You know what they say; shouting things loudly does not make them true. That is to say, there is no demand-pull inflation in Turkey; on the contrary we are facing cost-push inflation. That is why trying to reduce inflation by triggering economic slowdown might result in severe problems. Foreign experts are blaming Ankara for taking things lightly but the comments and criticism they give clearly shows that they are taking things lightly too.

“It’s time to reduce taxes …”

Increasing commodity and energy prices, Deteriorating pricing behaviour in a number of sectors including agriculture and industry, and exorbitant import duties are three main reasons lying behind high inflation. Topping it all off, increasing exchange rates is making this equation even more complicated.

Indirect taxes and import taxes levied on intermediate goods, raw materials and investment goods must be reduced. Customs duties that had been hiked by some business groups just to protect their own interests are bringing great harm to Turkey today. Therefore, you need to reduce production costs first in order to fight back against inflation.
Naturally, interest rates rank first place in this list of production costs. However, it is not possible to reduce interest rates unless you manage bring inflation under control first. So, Government must make every effort to decrease production costs. I know that I keep repeating myself but my fear is that PPI will hit triple digits soon.

Accordingly, we expect public sector to take urgent preventive measures to control inflation and help producers breathe a sigh of relief by reducing import duties and indirect taxes. Also, indirect taxes oninelastic items (vital consumer goods) should be reduced as soon as possible, which would also mean for the state that the time has come for shrinkage. It is hard to admit but this just might be the only solution.