It works…unt l t doesn’t

Dunya Executive - - REPORT - Strateg st, Commerzbank

All said, the inflation report is not a departure from past practice at all. The Central Bank of Turkey (CBRT) simply repeated the summary, albeit with hugely higher inflation numbers. For us, the main takeaways are: 1) CBRT is not looking to hike rates further even though the real interest rate has dropped to zero. 2) There is no discernible difference in the Central Bank’s reaction function now compared with previous years – the comprehensive fight against inflation exists only on paper. Reading between the lines when key policymakers have spoken, it is clear that they acknowledge that CBRT’s past policies were not adequate. For example, when Mr. Simsek famously tweeted about taking back Central Bank credibility (during the emergency rate hike of May), that automatically acknowledged that credibility was low before. Similarly, when Minister Albayrak says that the CBRT has launched a comprehensive fight against inflation, it acknowledges that inflation was not tackled before. And now, the Bank will continue to follow that old style: just as it did last year, the CBRT insists that its policy stance is already tight when the real interest rate is in fact zero. This may work for some time while the lira is benefiting from external developments…until it doesn’t. (October 31)

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