A Fragile Plan

I suppose the new road map for Turkish economy will be more or less as follows, following the rate decision and statement of the CBRT.

- Aware of the money supply and government spending levels, CBRT expects inflation to decline under the base effect.

- CBRT will say "our method is working" when inflation rate begins to decrease in the upcoming months, because it knows that the 12-month inflation, which will be released at the beginning of July, will be hit a peak level and then start dropping.

- Central Bank will gradually liberate exchange rates with the expectation that tourism revenues will go up and the markets will be calm during summer. In the meantime, it will purchase foreign currency to replenish its FX reserves.

- Meanwhile, it will encourage banks to offer high interest for conversions from FX-protected deposit accounts (KKM) to foreign currency fixed deposits.

- CBRT will prepare to cut rates, considering that inflation will be around 50% towards autumn and therefore a 50% policy rate will be much more acceptable than before.

- CBRT will keep stressing the "expectation after 12 months" in each MPC meeting since it knows that the year-end inflation rate will be at least 10 points above the target, which is 36%.

Well, the plan looks pretty solid on paper and apparently Turkish Central Bank will not give it up as long as long as the support from the business world and market actors continues.

But are there any potential negatives of this plan?

Yes. One of these negatives is that it is likely that there will be some conflict between tenants and landlords as the CPI exceeds 70% in June, first of all. At the same time, wage earners will rightly say, "Our wages do not go up with inflation!”, while business owners will raise their prices to compensate for their loss. And Turkey will continue to be the most expensive country in the region.

In the meantime, the members of the People's Alliance will test the determination and assertiveness of the main Opposition Party, which now has the majority in the Parliament, regarding the Constitutional amendments, and will realise that they will have to convince the latest victor of local elections if they want things to work out in the long run.  

The bottom line is that the CBRT and the Ministry do not have a substantial solution to address the current problems, nor do they have the willingness to embrace radical methods because of the government politics. This goes to show that maintaining financial and fiscal discipline is the first key step in fighting inflation, otherwise, inflation will remain relatively low only for a temporary period of time.   

As the Government relies on a fragile plan hoping that summer time calmness could alleviate some of the problems, savers will continue to benefit from low exchange rates, regardless of bank interest rate levels.