TEPAV: No Need for Interest Rate Changes, Structural Reforms Are Essential
Foreks - The sixteenth Monetary Policy Assessment Note prepared by TEPAV's Macroeconomics Working Group has been published. The note contains significant analyses and evaluations regarding Turkey's monetary policy and economic situation.
Key highlights from the December 2024 Monetary Policy Assessment Note include:
Turkey's consumer inflation is above the G20 average. As of November 2024, the monthly consumer inflation in Turkey was recorded at 2.24%. This rate is considerably high compared to G20 countries. However, a noticeable improvement in the risk premium has been observed. In recent weeks, the risk premium has hovered around 247 basis points, showing a significant decline compared to previous periods, though it needs to decrease to lower levels.
Macroprudential restrictions adversely affect the fight against inflation. The macroprudential restrictions applied in the credit market have caused credit interest rates to remain above the levels necessary for combating inflation. Given the supply and cost-related negative impacts of the regulations, a reassessment is necessary. Additionally, despite measures that restrict the supply of dollar-denominated loans, the process needs to be carefully monitored in terms of financial stability.
High budget deficit persists. Despite measures taken for 2024, the budget deficit continues to remain at high levels. It is essential to implement additional measures to meet the targets outlined in the Medium-Term Program (MTP) for 2025.
One-off price hikes lead to high inflation rates. One-off significant increases in the prices of goods and services set by the government affect the prices of important production inputs, leading to a dynamic cost rise process that complicates the fight against inflation and results in high monthly inflation rates.
The process of returning to rationing is not sufficiently supported. The process of returning to rationing in the economy is not adequately supported by social groups. If this process is not transformed into a comprehensive program and social support is not provided, the effectiveness of the fight against inflation may be questioned.
The program lacks structural elements. The program's reliance solely on monetary policy without incorporating structural elements leads to signals of a slowdown in economic activity, questioning its sustainability.
Different statements may reduce the effect of monetary policy. Statements made outside of the central bank's announcements carry the risk of diminishing the effectiveness of monetary policy and having negative effects on the risk premium.
Uncertainties in inflation targeting continue. The significant discrepancies between the inflation data released by TÜİK and those from other institutions may provoke public criticism regarding which inflation rate is used to make interest rate decisions.
Annual inflation target remains uncertain. Although a medium-term inflation target of 5% has been announced, the absence of official targets for the intervening years creates uncertainty in interest rate decisions.
Inflation expectations are not anchored. Pricing behaviors of companies not operating in competitive markets aiming to maintain their profit margins at a certain level create inertia in inflation.
Monthly inflation rates do not align with expectations. The monthly inflation rates that occurred between July and November 2024 being above the Central Bank's year-end forecasts prevent improvements in expectations. This discrepancy needs to be resolved before any interest rate cuts.
Social costs must be considered. Attempting to achieve the inflation targets set at 17.5% and 21% for the end of 2025 in the Medium-Term Program (MTP) and the Central Bank’s Inflation Report solely through monetary policy is not considered an appropriate option in terms of social costs.
A new development strategy is needed. Currently, the perception that inflation is the only issue in the Turkish economy and that the existing economic program focuses on solving this problem is reinforced by statements from those designing and implementing the program. However, there is a need for a new development strategy that can be embraced by broad social segments and generate enthusiasm for "significant changes happening in the country." An economic program strengthened by structural reforms based on this strategy could facilitate the fight against inflation while laying a solid foundation for economic growth and stability.
Fiscal policy should support the fight against inflation. It is crucial for fiscal policy to support the fight against inflation. In this regard, tax reform, combating the informal economy, effective management of public expenditures, and reviewing conditional income guarantees are needed. Furthermore, the government's decisions regarding prices should support the fight against inflation, structural issues in pricing behaviors must be addressed, competition should be enhanced, and consensus with companies is important.
Structural regulations are necessary. In addition to the policies that will support macroeconomic stability, strengthening independent institutions like the Central Bank of the Republic of Turkey (CBRT), Turkish Statistical Institute (TÜİK), and Banking Regulation and Supervision Agency (BRSA), increasing efficiency, accelerating green transformation, improving the quality of education, and establishing a fair and swift legal system are among the structural regulations that are needed.
There is no need to change the policy interest rate. Although it has been argued that a limited interest rate cut would not harm the fight against inflation, a downward trend in the underlying inflation should become evident in a manner convincing to the broader segments of society. Additionally, the effects of regulations that hinder access to financing in Turkish lira, the real valuation of the lira, and potential elements of financial instability should be monitored carefully. Interest rate cuts should be approached cautiously considering the Central Bank's foreign exchange reserve levels, and postponing foreign currency purchases may have unintended consequences. The Central Bank should establish strong communication with economic actors to control expectations and pricing behaviors. In this context, announcing annual inflation targets together with the government may be an important step. Finally, to fully achieve a return to rationing in the economy, the steps outlined above need to be implemented swiftly.