Turkey’s Dovish Monetary Policy Bias Starts to Waver

March 18, 2010

Turkey experienced one of the world’s sharpest drop in central bank interest rates.  For 13 consecutive meetings starting with a 50-basis point reduction in November 2008 and ending with a 25-bp cut in November 2009, the overnight borrowing rate was slashed from 16.75% to 6.5%, and officials have affirmed in each of the ensuing four meetings including today that the rate likely will stay low “for a long period of time.”  But CPI inflation rose from 5.1% last October to 6.5% at yearend to 8.2% in January and 10.1% in February, and not surprisingly, measures of expected inflation show upward movement now as well.  Officials had blamed the burst of inflation on temporary factors, but are now not so sure about the prognosis being benign.  Accordingly, today’s statement from the central bank inserted a new caveat.  After repeating that rates should stay low for a long period of time, the communique adds,

However, the central bank will not hesitate to tighten monetary policy sooner than envisaged in the baseline scenario of the inflation report, should the recent increase in inflation expectations lead to a deterioration in price setting behavior.

Turkish unemployment is at 16.1%, giving the country a misery index (inflation plus joblessness) of 26.2%.  Although GDP rose 2.3% annualized in the last reported quarter, on-year growth was minus 3.3%.  In light of such and the uncertain global economy, it’s understandable why officials are not anxious to lift interest rates.  It may be that they hope this protest will stop expected inflation from rising, but that’s unlikely.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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