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    Did it really work?

    Fatih Özatay, PhD19 July 2012 - Okunma Sayısı: 897

     

    The intentional depreciation policy on lira did not contribute to Turkey’s competitiveness for the current period.

    Now we can discuss it comfortably. Inflation performance in the recent months was better than expected. Accordingly, analysts lowered their year-end inflation estimates. On the other side, the Central Bank (CBT) became more confident and assertive that its year-end estimate at 6.5 percent will be fulfilled. Meanwhile, severe criticisms on this column about the CBT’s policies became less probable to lead to a “defense reflex.” Maybe what I am going to say makes those who discuss the issue almost at the “those who like the CBT” vs. “those who don’t like the CBT” level rethink the issue on the table.

    What we need to rethink is the inflation-triggering effects of the CBT policy to raise exchange rate over an extended period, initiated in the late 2010 and pursued during the second half of 2011 until the Europe-oriented turmoil in global markets. Let’s take a look at the price movements calculated with the "l" index that excludes the prices of energy, food, tobacco, alcoholic beverages and gold; the index to which the CBT analyses pay special attention.

    In October 2010, headline inflation was as low as 2.5 percent. The rate increased continuously until January 2012, finally reaching 8.4 percent. Another striking development was that between November 2011 and April 2012, headline inflation floated between 7.9 and 8.4 percent. By the end of this phase, the rate was standing at 8.2 percent. I’m not kidding: we are talking about a period of sixteen months constituted of two phases. In the first phase of price stability, headline inflation suddenly reached a high level compared to international standards and in the second phase it stuck there.

    It is a blatant fact that changes in exchange rate are one of the main determinants of inflation. There are a number of reports by CBT experts that give satisfactory proof on this account. The relationship between exchange rate and inflation is not only strong. Annual changes in particular indicate that changes in exchange rate (the lira value of a half-euro half-dollar basket, for instance) affect the inflation rate in the same direction with a certain delay.

    Between October 2010 and July 2011, the value of monthly FX basket increased by 18.2 percent. Again from October 2010 to October 2011, headline inflation increased from 2.5 to 7.7 percent. Then in November 2011, the rate reached 8.2 percent. Given the lagged impact of exchange rate on inflation, it is evident that the rise in headline inflation until November was influenced highly by the exchange rate movements until August.

    For a couple of months after then, signs were seen that the exchange rate went out f control due to the developments in Europe. The hike in inflation continued for some time more. Let me neglect the impact of the current state in Europe and focus on the period ending in August. Until that time, value of the emerging market currencies with which the CBT compares the value of lira either decreased slightly or remained constant. The lira, on the other hand, “intentionally” lost value because of the aforementioned CBT policy. The problem is that, “easy come” was “easy gone.” The intentional depreciation policy did not contribute to Turkey’s competitiveness for the current period. I will continue.

    This commentary was published in Radikal daily on 19.07.2012

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