What will Turkish Central Bank do now?

Inflation rates released on Monday were quite interesting in many respects. Inflation figures, which would normally turn out to be negative in summer, appeared as negative in November maybe for the first time in a long time.

As I mentioned yesterday, I think Government is being hasty in stating that “the downward trend will continue”, right after we saw a decline in November inflation rates; because, it requires a combination of movements occurred at least during a couple of months in order to recognize a particular motion as a “trend”. It would be wiser to regard November as a time for cooling after the record breaking inflation rates in September and October.

Tax cuts, decline in energy prices and exchange rates are among the main reasons for the decrease in CPI and PPI. However, we can see that the price of only a few products in the index has lowered. As for the PPI, it stands out with the decline in exchange rates.

In the light of the abovementioned facts, we would be mistaken to expect CBRT to take a brave action for the moment. Although high expectations for the Fed to be more cautious about interest hike this time seem quite promising, I think CBRT should help 2018 end peacefully by not taking any drastic step in December. Otherwise, a potential rise in exchange rates would be inevitable. Besides, yesterday’s sharp market movements were quite reflective of this unrest.

Monetary Policy Committee meeting on December 13th will be extremely significant in many respects.

“Can decreasing inflation rates boost overall demand?”

On the other hand, I can understand why the Economy Administration is feeling so anxious. They are obviously looking to create an environment where they can make a drastic reduction in interest rates to satisfy voters prior to the upcoming elections. However, the results of surveys conducted about the factuality of interest rates released yesterday do not seem very promising, which means this decline in inflation rate does not look plausible for so many reasons.

Nevertheless, we cannot ignore the fact that something is in motion to help CPI mathematically fall back to 14% before the elections. This is seemingly likely to be true considering the base effect.

Maybe the lack of demand, which is among the causes of falling inflation rates, can turn into an increase of demand with a sharp decline in CPI and stop GDP growth slowdown. If demand starts to increase, we would be able to monitor its progress through industrial production index and consumer confidence indexes. However, as I have mentioned above, even though inflation figures begin to decline, since many people declare that they do not see prices are falling, it seems quite unlikely that they can help boost overall demand at this stage.

If, within a few months, people become convinced that inflation has indeed fallen, overall demand can revive again. Remember, economic management is the ability to mostly manage people’s expectations.