Inflation matters more than ever

CBRT expectations survey point to 41-42% by the end of the year. This looks reasonable given the favourable base effects and the increasing likelihood that the current course will continue.

ι• CBRT expectations survey point to 41-42% by the end of the year. This looks reasonable given the favourable base effects and the increasing likelihood that the current course will continue.

• Given that the current CPI is c. 68%, this can be seen as an improvement. However, once the base effect disappears, it will be harder to keep the disinflation trend going if monetary policy is not supported by fiscal policy.

• There is also what is called incomes policy. This in fact means lower wages and pensions. But they are already low. Hence, it is difficult to imagine an extremely firm standing on that front. Still, one should not expect a steep minimum wage hike come January.

• Although some people may claim that Mr. Şimşek’s monetary policy orthodoxy alienated voters and caused them not to go to the polls or vote in protest, this is only confusing cause and effect.

• The orthodox approach is a delayed response to previous wrong policies and people generally understand that.

Inflation is far too high, retirees cannot make ends meet, and people voted against the incumbent party because of economic reasons mostly.

• I think there is no going back to low interest rates and generous loan supply via public banks.

Not only this is a sure recipe for disaster but also without visible disinflation the incumbent party may never win.

• As in the late 1990s and early 2000s, exchange rate stability is the key because exchange rate pass-through is again quite high and there are no adequate reserves at swap-excluded minus USD 65 billion net reserve level.

• The CBRT has now plenty of time. It will accumulate reserves again since elections are over. As some large international investment houses have begun to voice, the firm orthodox standing can pay off this time around.

• At effectively 53% funding rate, monetary policy is realistic and I do not see any reason to raise the policy rate further given 36-42% expected inflation. The important thing is to make investors and households believe that the current economic team is here to stay –and they gradually come to believe that.