Higher inflation to be transitory

Dunya Executive - - ANALYSIS -

I think two-digit inflation is transitory. This may look a bit far-fetched, but I think fluctuations within a band of 8 to 9 percent might not change an iota of monetary policy for two reasons. First, the Turkish Central Bank may not react, at least not by raising the policy rate, claiming rightly or wrongly that any possible increase is cyclical due to food prices or otherwise. Secondly, the Central Bank may well fix its gaze on international financial flows much more than it cares about the vicissitudes of inflation that is likely to remain in the single digits. Raising the policy rate is not a popular option and local monetary policy is biased toward easing. What may happen then if the Turkish Central Bank stays put throughout? It does not exactly stay put, as we have recently seen. Admittedly, the late liquidity window may not truly be the most efficient channel through which monetary policy is tightened, but the recent response of the Central Bank to the Fed’s move signals, at the very least, that exchangerate stability is an important priority ahead of the referendum.

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