This is the final part of our coverage of CBRT’s quarterly inflation report. After a lengthy speech, Governor Erkan wowed to stay on the course of monetary tightening until inflation outlook is consistent with the ultimate target of 5% annual CPI.
While her speech is technically masterful and the diagnosis more-or-less realistic, Erkan needs to focus on PR. Monetary policy is one part fiddling with rates, one part credibility and one part forward guidance. Lacking credibility and limited to gradualism by President Erdogan, Erkan’s most powerful tool at her disposal is forward guidance. She didn’t use this effectively. For instance, she could have explained what CBRT means when it uses the expression “real interest rate”? How would CBRT respond to deviations from the projected path? It is refreshing to see CBRT waking up from a very long slumber under the reign former governors to sober assessments, but much needs to be done on honing PR skills and actual delivery of tightening to gain credibility. (PA Turkey staff comment)
Here is what she said:
As we have stated in our previous policy documents, we are still going through the transition period before the disinflation and stabilization processes we have envisaged.
During this transition period, we are witnessing a temporary rise in inflation as we had transparently shared in the July Inflation Report.
In this process, we are carefully laying the groundwork for a sustainable disinflation process.
The impact of monetary policy on inflation is determined by various channels such as demand, expectations, asset prices, financial conditions and loans. Therefore, monetary transmission is achieved through effects that are spread over several quarters.
We will continue monetary tightening until significant improvement in inflation outlook is observed.
We will see the effects of our monetary tightening process in 2024, when disinflation will be established.
During the disinflation period, exchange rate stability, improvement in the current account balance, lasting increase in capital inflows and an increase in reserves will continue.
Disinflation period will be followed by the stability period in which predictability will increase, inflation will come down to single digits, and high-quality growth and disinflation will be achieved permanently.
I would like take this opportunity to re-iterate that we will decisively use all the tools at our disposal until inflation falls to single-digit levels and to our medium-term target.
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