TEPAV: Frequent Changes in Official Inflation Forecasts Undermine the Credibility of Monetary Policy
In the November 2024 Monetary Policy Evaluation Note prepared by TEPAV, it is stated that the frequent changes in official inflation forecasts hinder the improvement of expectations and damage the reputation of monetary policy. It is emphasized that "the Central Bank must maintain strong and effective communication with all economic actors to control expectations. In this framework, it may be important for the Bank to announce annual inflation targets together with the government as a significant first step."
The fifteenth Monetary Policy Evaluation Note prepared by the TEPAV Macroeconomic Working Group has been published. The note includes significant analyses and assessments regarding Turkey's monetary policy and economic situation.
High inflation compared to G20 countries Turkey's monthly consumer inflation in October 2024 was 2.88%. Although this rate is high compared to G20 countries, the risk premium, which hovers around 254 basis points, is viewed as a sign of improvement. However, it is emphasized that this premium needs to be lowered.
Inflation is expected to decrease, but risks remain It is anticipated that inflation will trend downward if the program aimed at macroeconomic stability is maintained; however, various risks, such as constraints in the credit market, a high budget deficit, increases in the prices of goods and services set by the public, and limited support for rational economic transformation, complicate this process.
Constraints in the credit market negatively impact the economy It is stated that the macroprudential restrictions in the credit market keep interest rates higher than necessary for combating inflation. Furthermore, the measures aimed at dollar-based credit supply need to be closely monitored for financial stability.
Additional measures should be taken to ensure budget discipline It is noted that the high budget deficit throughout 2024 makes it difficult to achieve the targets of the Medium-Term Program. In this regard, additional measures to ensure budget discipline are considered necessary.
Public price increases affect inflation expectations One-off increases in the prices of goods and services set by the government are said to raise production costs, leading to high monthly inflation rates. This situation complicates the alignment of inflation expectations with targets.
Questions regarding the sustainability of the program are increasing The lack of structural components in the program based on monetary policy is said to lead to signs of slowdown in economic activity, subsequently bringing discussions about rapid economic contraction and increasing doubts regarding the sustainability of the program.
The management of the policy interest rate should be centralized It is emphasized that the policy interest rate should only be addressed by the Central Bank. Statements from other institutions may undermine the effectiveness of monetary policy and increase the risk premium.
Divergent inflation data creates trust issues The differences in inflation data between TURKSTAT and other institutions are noted to undermine confidence in interest rate decisions. Moreover, frequently changing inflation forecasts are assessed to have negatively impacted the reputation of monetary policy.
Structural reforms are necessary It is stressed that the fight against inflation cannot be sustained solely through monetary policy, highlighting the need for a new development strategy and structural reforms. In this context, tax reform, combating the informal economy, and effective management of public expenditures are listed as steps to be taken.
No need for a change in the policy interest rate It is stated that there is no need for a change in the policy interest rate given the current economic conditions. Financing arrangements in Turkish lira, foreign exchange reserves, and economic expectations are noted as elements that need careful monitoring.
Strong and effective communication is a must It is indicated that the Central Bank needs to announce inflation targets together with the government and establish strong communication with economic actors, suggesting that this step will enhance the effectiveness of monetary policy.
Strong steps should be taken for rational transformation in the economy It is expressed that the implemented program needs to be expanded to fully achieve rational economic transformation, and steps supporting this transformation should be swiftly realized.