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    An unfortunate statement

    Fatih Özatay, PhD31 July 2014 - Okunma Sayısı: 1633

    I think the following should be the most unfortunate statement ever coming from a central bank official: “Inflation has been obstinately high lately. We have introduced new measures. If these don’t work either, we will start considering structural problems. Hence, if we cannot attain a sufficient decline in inflation, we might have to declare a higher target for the next year end.”

    When it comes to inflation, the size of the damage can be blurred if its current level is considerably lower compared to the past.

    The consequences of inflation at about 70 percent can be learnt the hard way by experience. The ability to learn such lesson vanishes when the rate floats around 8 percent, even though such level should have been stimulating enough. The purchasing power of 100 liras at 2006 prices is currently at 50.68 liras. That is to say, the 8-percent inflation has been eating Turkey up inside. Turkey met 1, 5, and 10 “kurus” (a hundredth of one lira) when six zeros were omitted off. Does anyone use them today? Even 25 kurus coins are left at home in the change boxes.

    I think the following should be the most unfortunate statement ever coming from a central bank official: “Inflation has been obstinately high lately. We have introduced new measures. If these don’t work either, we will start considering structural problems. Hence, if we cannot attain a sufficient decline in inflation, we might have to declare a higher target for the next year end.” These are not words of the Central Bank Governor per se, but it is what his latest statements roughly meant. Yes, he indeed said these in spite of the current level of inflation as I mentioned above. I wish he had not.

    This statement is unfortunate whichever way you read it.

    My first question is: have you perfectly done your share that you are just ready to accept that inflation cannot be lowered any further? There also are a bunch of versions of this question. For instance, despite that the average inflation rate of the past three years exceeded 8 percent against the target at 5 percent, the latest figure (for July) stood at 9.2 percent, and the official year-end estimate which is deemed to be extremely optimistic by many experts is as high as 7.6 percent, it was the Central Bank who initiated consecutive action to cut policy rates, wasn’t it? How does this qualify for anti-inflationary efforts that it allows the Bank to decide that the inflation is structural?

    Second question: Since when does the Central Bank decide the inflation target? Isn’t it ruled by law that the government and the Central Bank collaboratively announce the target? Given that, if another government comes to power promising to cut inflation to 4 percent, for instance, wouldn’t the given statement of the Central Bank create a negative opinion on the attainability of the target? How does the Central Bank have the right to jeopardize a possible anti-inflationary economic program by saying that inflation might be structural and hence might not be lowered further?

    Third question: The Central Bank, on the basis of the vague objective of financial stability as indicated in its law, can give prominence to other policy targets. Indeed, such rhetoric is quite fashionable lately in many emerging market economies. OK, but then why don’t you just declare that financial stability targets are the primary objectives of the Bank and announce (together with the government) a higher inflation target, without talking about the risk that inflation might not be lowered and hence without jeopardizing a possible sound anti-inflationary program? Doesn’t this sound like a more solid plan?


    This commentary was published in Radikal daily on 31.07.2014

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