Turkish crisis control & live-blogging from Inflation Report
Two key days for Turkey to see if officials will be doing crisis control. First, we have the Inflation Report in a a few minutes- I will do (almost) live-blogging Governor Basci’s presentation below. I am saying almost because I am live-blogging in front of the TV; I am not in Ankara, and let me tell you: It is much more comfortable to live-blog this way, writing on my desk while sipping my coffee:)
I hear Economy tzar Babacan is meeting with market economists one-on-one today to listen to what they have to say. Then, we have the Central Bank’s monthly meeting with bank economists in Istanbul tomorrow- that one I won’t attend to, not only because I am not in Istanbul, but also I guess I am considered a journalist by the CBT and no journalists are allowed. But today and tomorrow’s meeting will be crucial to see if the officials will opt for crisis control or blow wind to the fire…
Now on to Basci’s presentation:
“There are 11 special boxes in the report on the Turkish economy.” E.D.: If this is what I think it is (i.e. some proof on their claims), then well-done on communication, I’ll check it out as soon as the report is up.
Basci started with global development, nothing new. He is explaining the policy mix, nothing new here.
“We are closer to downward scenarios; that’s why we talked on a expansionary scenario in the last MPC meeting”
It seems the Bank has not updated their forecasts by much.
“Data are weaker than we expected, so are revising downwards our output gap estimates for the second quarter”
Basci emphasized the recent monthly decreases in industrial production and capacity utilization.
He emphasized the importance of reducing credit growth.”It shows us the result of our several policies. Therefore, we give our credit growth forecasts in the report as well”.
The midpoint of end-year inflation forecasts is unchanged.
“Inflation will be volatile in the second half because of food prices” The CBT expects some decrease in inflation (% yoy) in the coming months.
“As long as demand is weak, the effect of import prices on inflation will be one-time”. E.D.: This is the low FX pass-through argument. I hope they have a box on this, providing “some” proof to their arguments.
Basci is now discussing risks, mainly talking on the “usual risks”, i.e. Euro Area, emphasizing downward risks. He mentioned narrowing the interest rate band corridor, but “if conditions are still worse, then we’ll use all our tools in an expansionary manner”. “But if global conditions are prolonged, then we’ll continue with low interest rates, high required reserve ratios for a while.”
“The upward creep in core inflation is a risk. If continues, then we won’t hesitate contractionary measures”. But he is not specifying when and what instruments, noting it will demand domestic and global conditions.
“We assumed extra revenues to the budget will be saved; if not, we will reassess our stance”
But before I forget, Basci told they are comfortable with the lira’s path. I thought I had misheard, but the first question is about that.
Now, the Q&A session:
Q. What should be done about food prices? How about the lira?
A. “About the lira, we will use a graph in our meeting with economists tomorrow: When you look at real exchange rate, the lira is definitely overvalued anymore (no shit, Sherlock), but we also think it has given its maximum support to the current account.” E.D.: So he is saying he does not want more depreciation. This is comforting.
Q. Do you have a currency level on your head?
A. “You’ll see this on Friday’s presentation as well. We have no currency level whatsoever in our head. But a currency can deviate from its equilibrium level. But there is no appreciation pressure on the lira. This is a result of our policies.The global liquidity glut is appreciating currencies and increasing credit; we prevented that”
Q. What about recent S&P remarks?
A. “The analysts are talking about a sudden stop. We need to be prepared for that although there is not a big chance of that, and we are prepared. If there is a sudden stop, the Central Bank will do a sudden beginning, with FX selling auctions and funding the market with open market operations. Just as, contrary to some analysts, we don’t see overheating, we don’t see hard landing, either.”
Q. Large question on many issues: Interest rate lobby, what media is writing, etc etc…
A. “Our press should be careful in what they write” E.D. OK, I’ll take note:)
Q. Some comment there was lack of experience on Friday’s Denizli meeting. What do you have to say for that?
A. “Please have a look at that presentation Turkish households do not have open positions. There, we referred to the October 2006 warning by the CBT. Turkey does not have an open position; this is Turkey’s big plus. The same goes for the public sector. Our businessmen know and manage their risks. There is no problem with FX-earning businesses to borrow in FX.”
Q. If currency depreciates, we’ll see the markets don’t take you seriously (what kind of question is this). How should people consume to be in line with your policies?
A. “Currencies are determined in markets. We don’t recommend on consumption. We focus on banks; we don’t want banks to lend to the guy who wouldn’t borrow anyway. In tomorrow’s presentation, we also have seasonal averages of credit growth, and we’ll show it will slow down. Next precautions will not be costly for the banking sector; there are some measures on margins and the like” E.D.: Aha! We know a bit more about these mysterious measures I had been wondering about:)
Q. ?
A. From now on, spreads are a better measure than CDSs for risk. E.D. Very good point because it is not certain when CDSs will be realized…
“If things get really bad in Europe, we can call our MPC with a phone call and get the necessary precautions” E.D. This would be a special meeting.
Q. What about PM’s speech?
A. “I find it very +, as he talked on fiscal policy. A fiscally good MTEP will appreciate the lira, but there are global factors that could work the other way as well…” E.D. I don’t!
Q. What are these other precautions on financial sector?
A. “We are working on them, but the idea is to work on margins- marginal RRRs, it could be on leveraging. We could discuss these with the sector and Financial Stability Board.” E.D. These seem to be in a very early stage.
Q. After what level will currency exter pressure on inflation? Will it impact growth?
A. Currency change is more important than levels. Note that inflation would have been much lower had not been such a depreciation. This shows there are no inflationary pressures. Net exports will contribute positively to growth in second quarter.
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