Weekly Hurriyet column: And the Oscar goes to…
Below is my Hurriyet Daily News column for this week, which you can also read at the Daily News website. I will have an addendum at the blog later today, as usual, but before that, I should point out the Daily News piece of today about the new Almodovar movie. It is purely coincidence; I had no idea they were doing an article on the movie. And I have no idea why, as IMDB is saying that it is supposed to arrive to French theaters in August. Moreover acute readers will have noticed that the title of my last graph is a homage to one of my favorite Almodovar movies.
Anyway, on to the column:
I wasn’t at the Central Bank’s regular meeting with bank economists last Tuesday, but according to the reports I read and the impressions of my friends who were there, the Bank’s presentation and the following Q&A session had all the ingredients of an Almodóvar movie: Comedy, passion, drama, mystery, intrigue.
Comedy: Gov. Erdem Başçı introduced Necati Şahin, one of the new members of the Monetary Policy Committee, or MPC, as a hawk. His last name translates as “hawk”! Abdullah Yavaş, another MPC member, then asked the Governor not to translate his last name, which means “slow.”
Passion: The Bank passionately believes that the inflationary outlook is benign. But Başçı did not give a convincing explanation of his confidence on inflation, other than noting that the exchange rate pass-through would be less than in 2006 because firms, facing more competition, are less able to pass on depreciation in the form of higher prices. That may well be the case, but I would have preferred some proof.
Drama: The Bank is saying that the current account deficit would improve in the last quarter of the year due to base effects. This is what I had been saying as well, in reply to the Bank’s claims that its policies would control the deficit in the last quarter. The Bank does not see the deficit at 5 percent anytime soon, highlighting that it is closely linked to the Fed’s balance sheet.
Mystery: Başçı stated that that the Bank has many tools that are less costly and even “costless” for banks. He also said they did not want to mention these tools at the meeting, but could announce them if there is need. I have no clue what these tools are.
Intrigue: The Bank claims that the recent increase in the share of non-resident ownership in government bonds shows investors’ confidence in its inflation-fighting credentials. I would think that it rather reflects the pick-up in flows to emerging markets. Besides, if the Central Bank is not going to increase rates for the rest of the year, bonds look very cheap.
In fact, the Bank made it very clear that it does not plan any monetary tightening in 2011. On the contrary, if “problems in advanced economies intensify, leading to contraction in domestic economic activity,” they will not hesitate to underake “an easing in all policy instruments.” The Bank’s worry about global conditions was a major theme of the meeting.
For example, if capital flows were to decline as the result of European debt concerns or the global slowdown, the Bank would reduce, or eliminate altogether, its foreign currency auctions, as I have been noting. It would also narrow the interest rate corridor to encourage short-term capital, reversing the policies of last year.
While I agree with the Bank, especially after Friday’s May Industrial Production, that quarterly GDP growth may be flat in the second quarter, early leading indicators do not suggest a prolonged contraction in economic activity. Nevertheless,the Fed and the global economy have become the new scapegoats to delay tightening.
If you look at the meeting as a whole, there emerges an element not even present in Almodóvar movies: Illusion. For that, the Bank deserves an Oscar.
Emre Deliveli is a freelance consultant and contributor to Roubini Global Economics. Follow his blog at http://www.economonitor.com/emredeliveli/.
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