Monday, August 2, 2010

Weekly Hurriyet Column: The Çarşı approach to monetary policy

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. As for the title and the rest of the football references, I finally managed to piss off a f3n3vbahc3 fan- see the comments at the bottom of the Hurriyet page.

As for the column, I don't have much more to say, except that the fiscal stance has become worse since I wrote this column, with the government finally admitting the fiscal rule is off the shelf at least until after the general elections. Oh by the way, my guess for July food inflation turned out to be a bummer, but as zhe French say, c'est la vie...Well at least, I now know that the food price rises I was experiencing was a regional seasonal phenomenon, probably related to suppliers taking advantage of the high season in tourism.
Anyway, on to the column:
The legendary Beşiktaş fan group Çarşı is renowned, along with their chants that often get plagiarized by the competition, for their never-ending optimism on the team’s prospects.

Take last year: Despite the rough-going early in the season, there was sincere hope that injured midfielder Matías Emilio Delgado would come back and save the day, or prized new acquisition Rodrigo Tabata would fill in his shoes if he didn’t. Both players had a dismal season.

I increasingly see the same spirit in the Central Bank of Turkey, or CBT. Their latest Inflation Report, which was released last week, continues in the tradition of the previous reports in adopting the asymmetric communication strategy of pumping up positive inflationary developments while downplaying the negative ones as temporary phenomena.

In fact, it was due to temporary factors such as softening food & energy prices and unexpected external demand weakness that the Bank was able to soften its stance from the previous report and revise down its inflation forecasts. It now sees inflation fall sharply to 5.5 percent early next year after ending the year at 7.5 percent, and then slowly converge to the end-2012 target of 5 percent after a short hike in the first half of 2011.

I would even argue that the end-year target is a conservative one. I also concur with the Bank that inflation will fall sharply early next year due, mainly, to base effects. But the trillion-dollar question is whether it will stay there, and I have two compelling reasons why it won’t.

First, 24-month ahead inflation expectations, hovering just below 7 percent, have proven to be sticky. The CBT is reaping what it sowed in the last couple of years: The upward revision to the inflation target two years ago and the Bank’s pro-growth stance seem to have damaged its credibility as an inflation fighter for good despite its meticulous track-record in being way ahead of the curve in predicting inflation. Expectations could prove to be a real headache for the Bank if they find their way into prices, but there is nothing in the Inflation Report on how it would react if that happens.
Interestingly, it is not that the market is not buying into the Bank’s policy stance. Policy rate expectations have proven to be less sticky and are now pricing 1.2 percent of hikes in the next 12 months. The market is even more forgiving: Cross currency swaps see no hikes for this year and a 1 percent increase in the next. So the market essentially sees inflation staying higher than the Bank’s target and the Bank simply not doing anything about it.
Second, the CBT seems to be overoptimistic on support from fiscal policy. I see that more and more academics and journalists, including some with tentacles in Ankara, are sharing my doubts about the fiscal rule, claiming that Economics tsar Ali Babacan has been isolated on the issue. Adding insult to injury, budget data have started to head for south, hinting on what is to come ahead of the general elections.

To fear leads such a fiscal stance for a central banker, as the wise Yoda would say: Not only it would be disrupting inflation expectations further, the new government would likely lean against tax and administered good price hikes, as such knockoff measures are the most common temporary patches to the budget in Turkey. Too bad they would have a side effect of inflation.

And if you are wondering, Beşiktaş fans’ hopes never materialized, with the team not winning a single trophy, whereas archrival Fenerbahçe was champions for a full two minutes. But I truly believe that Beşiktaş will be champions this year and win the UEFA Europa League. Just the same way the Central Bank thinks inflation will level off at 5 percent…

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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