The new CBRT governor, Hafize Gaye Erkan, provided her first public performance with the presentation of the Q3 inflation report.
First things first, she was articulate, open and answered a stream of questions personally. This is night and day from the term of the last governor, Kavcioglu. I gave up attending his presentations as he invariably failed to answer questions, passed them on to staffers to answer or read out bland statements to whatever question kind of turned up.
So well done to Hafize there. Big thanks.
In terms of content she was also refreshingly open about the challenge from inflation - the message was clear cut that inflation is rising, and indeed the CBRT massively increased its inflation forecast to 58% at year end, which is a massive upward revision on the prior forecast of 22% and indeed the last June print at 38%. This implies significant expected pass thru from the marked FX weakness since the election, and she indicated that the inflation pass thru has in fact increased now to nearer to 25%. Herein she is telling it as it is. We need more of this.
But in hiking the inflation forecast to 58% it also kind of implies a pretty weak response to fighting that inflation and, I would argue, unfortunately an unwillingness to that aggressively tighten policy which is really seen in the hike in policy rates only to 17.5% since the election. And while 900bps in rate hikes sounds a lot, when inflation is 38%, and real rates are still minus 20% plus monetary policy is still hardly tight - that said Finance minister Simsek is tightening fiscal policy aggressively, likely by 3% of GDP or thereabouts post election. We can debate whether tight fiscal, loose monetary policy is the right mix against a high inflation/devaluation spiral mix scenario.
The buzzword or perhaps even policy mantra from Erkan was that a “holistic” approach would be pursued in fighting inflation. In fact she mentioned the word “holistic” I think eight times during her presentations - “Holistic Hafize”. She argued that “holistic” meant policy rate hikes, use of the considerable macro prudential policy tools the CBRT now has in its arsenal (thanks to Basci, Cetinkaya and then Kavcioglu) and also targeting credit growth in key sectors, or limiting it therein.
She underlined that science and data were the only factors in determining the policy response and that they were adopting their measured policy rate hikes as they wanted to be guided by data as to how the measures were impacting. There message is clearly that they do not want to shock the system by rolling out double digit rate hikes and want to learn and calibrate as they go on.
The problem I think with the above is that the market just does not think that Simsek and Erkan have a mandate to do whatever it takes to fight inflation, at least not when it comes to policy rates, and that Erdogan is still the rate setter. And that while a “holistic” approach sounds nice it is really just a sanitised and alternative word for “unorthodox” and the problem with setting a 58% end year inflation forecast, when policy rates are only 17.5%, is that you lock in high inflation expectations and surely bake in further downward pressure on the lira and more inflation pass thru. Why would anyone want to hold the lira with 17.5% policy rates with inflation heading to 58%?
We like the new transparency on the threat from inflation but it all just looks underwhelming in terms of the ambition to fight inflation and, if I think that, I worry that ordinary Turks will think the same and that bakes in high inflation expectations for longer which will make the battle against inflation that much harder. Ultimately it means that policy rates will have to be higher for longer.
The concern will be that Simsek and Erkan have a limited mandate to fight inflation this side of local elections next March. Will the market give Simsek and Erkan the benefit of the doubt? They are both clearly very capable, technocratic and competent, but will trust in them be enough to buy time beyond local elections when the heavy lifting against inflation can perhaps begin?