Self-made, According to TurkStat, we closed the year 2023 with an inflation rate of 64.8 percent. For Istanbul, ITO calculates inflation at 74.9 percent, while ENAG measures 2023 inflation at 127.2 percent.
When monetary policy goes haywire, many things get out of hand. A few years ago, those commenting or reporting on inflation would not have mentioned different measures. It would have been enough to use only the inflation figures announced by TurkStat. Unfortunately, trust in the published statistics has been shaken. It is very difficult to restore this trust… There is now an indispensable need for structural reform. It is this: To make TurkStat independent as soon as possible. And not overnight, but after a healthy debate and a thorough discussion. If you look on the bright side, this is a relatively easy reform. It is not a politically difficult thing to do, such as tackling the informal economy. The whole point is to do it without the simplicity of saying “look, we did it”.
Another unpleasant aspect of inflation is that it will rise at least until May. According to Central Bank forecasts, it could reach around 75 percent by May. Will politicians tolerate that inflation, nearly a year after the program code-named ‘return to rationality’ was launched, will they tolerate inflation rising to a much higher level than when the program started, let alone falling?
If they do, and if the current program is maintained – albeit without any structural reform steps – things will be easier in the second half of the year. First, as you know, the ‘base’ effect will kick in. Instead of the monthly inflation rates of 9.5 percent in July and 9.1 percent in August, much lower monthly inflation rates will kick in, thus lowering annual inflation. To some extent, the base effect will also apply to June and September.
Second, external conditions are favorable for disinflation. The US Energy Agency predicts that the average Brent crude oil price in 2024 will remain almost at the level of the 2023 average. On the other hand, major central banks such as the Fed and the ECB have stopped raising interest rates and will start lowering them in the near future. This interest rate policy will allow for increased capital inflows to countries like ours. Of course, this opportunity will only be available for countries that do not make nonsense of their economic policies. Under these conditions, the Central Bank may continue with its fixed exchange rate policy in a way to limit the real appreciation of the lira.
These developments will make an important contribution to bringing inflation from its peak in May to the level projected for end-2024. But domestic demand growth should also help. If there is a frenzied credit boom, there is a danger that the subsequent surge in demand will allow producers of goods and services to easily raise their profit rates, and that exchange rate control will slip away. Both are inflationary factors. The danger of the exchange rate getting out of control stems from the fact that the increase in credit means that a U-turn in economic policy has begun. Therefore, it is imperative not to open the credit spigots wide open, especially before the elections. Not only that, there should be no rush to lower the policy rate.
