Insistent questions from the television host yesterday about my warning concerning 2020 inflation target made me decide to make a quick and clear analysis about the issue.
First of all, inflation rate in October turned out to be higher than expected. I can now see the reason why CBRT made those “pre-loaded” rate cuts. If CBRT cut rates twice, in October and in December, this would definitely lead to some problems.
In the meantime, I suggest you to get ready for a higher inflation rate in November. The positive aspect of the basis effect will be over when December inflation rate is released. So, this must be the reason why CBRT took a courageous action and cut rates by 250 bps in order to prevent possible trouble from happening in the future.
The average monthly tolerance limit for CPI in 2020 is around 0.7 percent. That’s our only option to achieve the 8.5 percent target as indicated in the NEP. If CPI exceeds 1% in any month over the upcoming year, we will have no other choice but to hope for a negative inflation rate either in June or July. However, if inflation turns out to be higher than 1% for several times in a row, Turkish economy may go off the rails again.
Here’s an example: CPI index turned out to be 0.99% in September and 2, 00% last month, which means the series of annual inflation will probably begin on these months in August 2020. As we have already hit 2,00 + 0.99 = 2.99 pts inflation in two months, we only have 7 points tolerance limit in order to prove that we are about to achieve our 10-month target. That is to say, CPI must reach a maximum of 0.7% each month.
This simple calculation shows us that we have no easy task. It seems unlikely to push citizens and business people to change their behaviours as Cost of Living and Costs of Production keep rising. I do believe that these developments will have a certain impact on CBRT’s policy interest rates.
“Why did FX rates go up?”
Well, FX rates did not go up. Only Dollar to Lira Exchange Rate has increased because Euro to Dollar exchange rate has sharply fallen. As there haven’t been any drastic changes to the (1 Dolar+1 Euro) /2 valuation that we call currency basket, if you ask me, these reactions are nothing but a storm in a teacup.
I suggest all experts to have a deeper look on the markets before coming up with conspiracy theories.
