by Shaun Richards
In the current melee where central banks essentially compete to match the moves of the US Federal Reserve some try to stand out.We have the Bank of Japan which sticks like glue to its -0.1% interest-rate and QE bond buying, but even more extreme is the central bank of Turkey or TCMB.
In this framework, the Board decided to decrease the policy rate by 100 basis points and evaluated that the updated policy rate is sufficient under the current outlook.
There is a sign of trouble in that the interest-rate even after the reduction was still 12%. For newer readers the policy here has been set by President Erdogan who has on several occasions offered the view that interest-rates create inflation and therefore that lower interest-rates will reduce it. If the central bank Governor has been unwilling to do this then they are simply fired.
How is that going?
As you can see this is a sort of work in progress.
Consumer price index (CPI) realized as 83.45% annually and 3.08% monthly
A change in general index was realized in CPI (2003=100) on the previous month by 3.08%, on December of the previous year by 52.40%, on same month of the previous year by 83.45% and on the twelve months moving averages basis by 59.91% in September 2022. ( Turkey Statistics)
Actually things are much worse than that for the policy because if we look back we see that there was a lift-off in inflation as it passed 20% in November 2021. It then went 30%, 40% and then 50% in short order on its way to where it is now. This followed a raft of interest-rate cuts starting with one from 19% to 18% on the 24th of September last year and so far at least ending with one to 12% a day under a year later. So the general thrust is exactly the opposite of the claims of President Erdogan.
If you are thinking but Shaun it takes 18/24 months for interest-rate moves to have an impact? Good as you have been following my thoughts. But we have a different and faster mechanism because the currency plunged and for once the use of that word is accurate. Some 7.6 Lira bought one US Dollar when this round of interest-rate cuts began as opposed to the 18.7 as I type this. So Turkish workers and consumers found themselves having to pay more for oil and other commodities in very short order and in some cases immediately. Their inflation breakdown is not entirely helpful in showing this but we do get a hint from the largest mover.
On the other hand, transportation with 117.66% was the main group where the highest annual increase realized.
Higher fuel costs have no doubt ramped that as higher costs generally were added to by the currency plunge. To some extent we get a hint of that from the slowest riser as well.
Communication with 30.76% was the main group that indicated the lowest annual increase.
As ever we get figures for those who do not need to eat or use energy.
The indicator for CPI having specified coverage (B) realized as 74.63% annually and 2.74% monthly
As you can see even with the swerve that central bankers love inflation is still 74%. I also note that Gold is mentioned here. I am trying to think of other consumer inflation measures which include it and am struggling. Anyway we can put it into context by the index being 1120.61 meaning prices have risen by over 11 times since 2003.
Do we believe it?
There is an unofficial measure of inflation which tells us this.
ENAGroup Consumer Price Index calculated using daily price data increased by 5,30% in September
2022 (from 31.08.2022 to 30.09.2022)…….The last 12 months increase rate in ENAGrup Consumer Price Index (E-CPI) is 186.27%.
There is quite a difference here to say the least and in particular they saw this in September.
A sharp increase has been experienced in Health by 26,05%
They get some potential backing from the official producer price series.
Domestic Producer Price Index (D-PPI) increased by 151.50% on annual basis, by 4.78% on monthly basis.
If we look back it was 44% when President Erdogan began his effort to cut inflation via lower interest-rates and is 151.5% now. There is a sector of this I would like to pick out because we were told that it would drive growth in the Turkish economy.
Manufacturing increased by 127.69% annually
How can you be internationally competitive when your costs are doing that? The highest other numbers we have seen are around 100% lower than that. So the initial gain from a lower currency has been substantially eroded quite fast.
Also as we continue our journey we see that there has alos been inflation in the number of inflation indices. Next up is the Istanbul Chamber of Commerce.
Compared to September 2021, the rate of change compared to the same month of the previous year, which shows the price changes in September 2022, was 107.42 percent in the 1995-based Living Wage Index of the Istanbul Chamber of Commerce and 98.17 percent in the Wholesale Price Index.
Retail prices in Istanbul rose 99.9 percent year-on-year last month, reaching the highest level since 1998. ( Dunya)
Downgrade
Ahval has been reporting this.
Standard & Poor’s downgraded Turkey’s credit rating to B from B+, the credit rating agency said in a statement on Friday after markets closed in the United States. The outlook on the rating is stable, it said.
Essentially for the reasons we have been looking at.
“In our view, highly accommodative fiscal and monetary settings risk further undermining confidence in the lira as a store of value, against a backdrop of tightening global financing conditions,” S&P said.
As ever they are behind the times.
Comment
This is quite a tail of woe in economic terms. The Turkish worker and consumer have been punished by sky-high inflation. There is no way of sugaring that particular pill. It has consequences for other economic data too.
GDP with chain linked volume index (2009=100) increased by 7.6% compared with the same quarter of the previous year in the second quarter of 2022.
That is supposed to be real economic growth but if it is understating inflation then they are recording nominal economic growth (of which there must be lots) as real economic growth. We get a hint of the problems here.
GDP increased by 114.6% and reached 3 trillion 418 billion 967 million TRY at current prices
Only a minor issue with inflation measurement would be a big deal and I think we het the clearest hint here.
Final consumption expenditure of resident households increased by 22.5%,
So households are being battered by inflation but they spent 22,5% more in real terms. Really? On this road we in my opinion have an economy that in fact may be shrinking.
We cab switch to trade and I know that its more than just Q2 but it is in fact subtracting from growth.
In January-August 2022 period, exports were 165 billion 608 million dollars with a 18.2% increase and imports were 239 billion 43 million dollars with a 40.7% increase compared with January-August 2021.
In another form we are looking at the cost of higher energy imports swamping any gain from the lower currency.
in August 2022; exports were 21 billion 337 million dollars with a 13.1% increase and imports were 32 billion 531 million dollars with a 40.4% increase compared with August 2021.
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