Tuesday, May 4, 2010

Addendum to this week's Hurriyet column

Tarik left a comment to a previous post, where I was forming the ideas of yesterday's Hurriyet column:
why do you think the cbt is swerwing off the road?because cbt is not sticking to its policies to reduce the inflation?if so why is not doing so? the economy is on its way to recover,so i guess the inflation should be increasing a little bit,what is expected to cbt is to bring the inflation under control if it gets out of control? can you explain why the credibility of cbt is questioned?
Tarik wrote this comment before he was able to read my column, so he should be OK with the swerving off the road, but it just means that the CBT will give in before markets in the chicken game. But in the latest Cnbc-e survey of policy rate expectations, now more economists and Treasury officials are expecting the first hikes in September and October, so first round to the CBT...

As for what would be expected for the Central Bank, raising rates would be one... There is also another argument for rate hikes, which I did not have enough space to explain in the Hurriyet column: All the Central Banks around the world, especially Turkey's peers, are either raising rates or getting ready to do so. One could example is Brazil, where the rate difference between the two countries, especially in real terms, is starting to get a bit too conspicuous. I wonder if this could start affecting portfolio flows and have negative consequences for the lira, but the Central Bank obviously does not think so.

As for Tarik's last question, the credibility gap is the difference between market's and CBT's inflation expectations. As the Bank just revised its year-end target to 8.4% from 6.9% and with year-end expectations at 8.2% (see graph below), there is no credibility gap on that front. But 12 and 12-month ahead expectations are still hovering around 7%, significantly above the Bank's targets for 2011 and 2012, presented below by Turkey Data Monitor:

By the way, Statistics continue to support the view that we may be seeing more of a base effect, with yesterday's consumer confidence and PMI releases being cases in point. The former brings home Mary's point on perceptions driving reality, which I really should look into one of these days...

1 comment:

Blogger said...

eToro is the ultimate forex trading platform for new and advanced traders.