Turkey review from Fitch: Dictating further easing is a significant risk

Elif KARACA

International credit rating agency Fitch’s Global Chief Economist Brian Coulton and Fitch Ratings Director and Turkey analyst Erich Arispe, WORLDHe made a special statement to

Brian Coulton stated that prices may start to stabilize in early 2022 with the ongoing developments on the supply side and the increase in manufacturing investments in the world; He said that if global energy prices do not continue to increase at the rates seen in the recent period, the impact of energy on CPI will begin to decrease in 2022. Stating that stagflation is not the right word to describe what happened in the global economy this year, Coulton pointed out that global growth is actually very strong.

Erich Arispe also said that high energy prices in Turkey, although not the main cause of rising inflation, may be a contributing factor, and that Turkey was struggling with inflation (14.5% annually at the end of 2020) even before commodity prices increased at the global level. Arispe Turkey’s vulnerabilities; He pointed out that it is high due to weakening external buffers, greater need for FX swaps, high dollarization and the external environment that has become more challenging.

Emphasizing that these vulnerabilities will intensify if confidence weakens and dollarization accelerates, Arispe said, “Political concerns limited the ability of the central bank to raise the policy rate again, despite increasing inflation and deteriorating expectations. Despite the macroeconomic instability risk and external vulnerabilities, due to similar political concerns, further monetary easing is a significant risk due to the closeness of the 2023 election cycle. In our opinion, early easing will show the weakness of confidence in monetary policy and will increase the difficulties of fighting inflation,” he said.

How long do you think the rising inflation rates all over the world will keep their high course?

Brian Coulton: The rise in energy costs in recent months has led to an increase in the global inflationary pressure from consumer prices since April. Although price increases are mostly spoken in the USA, they are felt all over the world. Although described as a typical ‘supply chain’ problem, the catalyst for the increases is actually the extraordinary rise in demand in the post-pandemic recovery. Demand for durable goods has slowed as financial incentives decline and consumers return to service consumption through reopening. With continued developments on the supply side and increased investment in manufacturing, prices could begin to stabilize in early 2022. If energy prices do not continue to increase at the rates seen in the last period, the effect of energy on CPI will begin to decrease in 2022.

What effects will rising energy costs have on inflation?

Erich Arispe: Central banks in developing countries have tightened their policy stances significantly in the face of pressures from rising food and energy prices and disruptions in global supply chains. While some of these factors are expected to be temporary, policy makers are looking to mitigate risks related to inflation expectations and secondary effects that could, for example, result from higher wage increases. For Turkey, higher energy prices may be a contributing factor to rising inflation, but not the main reason. Inflation has been at high levels with an average of 13.2% since the beginning of 2016 due to the lack of confidence in monetary policy, the effect of credit incentives and the constant depreciation of TL. Turkey was struggling with high inflation before commodity prices rose globally (14.5% annually at the end of 2020).

Have recent developments caused a change in your inflation expectation?

Erich Arispe: High energy prices, along with strong domestic demand and the depreciation of the lira, are among Turkey’s inflation dynamics this year. In September, we expected annual inflation to fall to 17.3% by the end of 2021. However, we will revise our forecast upwards in December, as our baseline scenario does not take into account the early policy easing that led to currency losses and deterioration in inflation expectations. In fact, the CBRT itself revised its year-end forecast, which was 14.1% in July, to 18.4% in its latest inflation report.

Fitch Ratings Türkiye Analisti Erich Arispe

“Early relaxation will make it harder to control inflation”

How do you evaluate the CBRT’s latest interest rate decisions, what effects will they have?

Erich Arispe: In our opinion, the premature easing in monetary policy will make it difficult to control inflation. The decisions taken reveal the weakness of the credibility of the monetary policy. The decision also carries the risk of undermining the recent partial recovery in Turkey’s international reserve position. Despite rising inflation, political concerns seemed to limit the ability to raise the policy rate, which was raised to 19% in March 2021, again.

Another important risk is that more monetary easing will be dictated to support growth despite external fragilities and macroeconomic instability risks, and due to similar concerns due to the imminent 2023 election period. Turkey’s vulnerabilities remain high due to weakening external buffers, greater need for FX swaps, higher dollarization, and a challenging external environment (due to higher energy prices and pushes that advanced economies’ monetary policy stances will become less supportive). These vulnerabilities will increase if domestic confidence weakens and dollarization accelerates.

Fitch Ratings Global Başekonomisti Brian Coulton

What would you say about stagflation expectations regarding the global economy?

Brian Coulton: Stagflation doesn’t seem like the right word to describe what happened this year, global growth is actually very strong. We expect world GDP to grow by about 6 percent in 2021, the fastest growth rate since 1973. Stagflation occurs when resource supply is heavily restricted, such as the OPEC oil price shock of the 1970s, and inflation rises even when demand and activity are weak. That’s not what we’re seeing today, supply is struggling to keep up with demand in certain sectors, but that’s because demand for consumer goods is so strong.

“There is no big deviation in medium-term expectations”

Could the rise in inflation be permanent in case of any wage-price spiral? What should central banks do to prevent this?

Brian Coulton: This is a real possibility and could cause a sector-driven price shock to translate into a wider and longer rise in inflation. The US is the country most at risk due to the level of economic recovery, the size of fiscal stimulus and wage increases.

However, we anticipate that the US labor supply will begin to increase in the coming months as progress in immunization and pandemic-induced disruptions to labor market activity (including the threat of school closures) ease. This will limit upward pressures on wages, but a sharp rise in inflation expectations may pose a threat.

The Fed and other major central banks are acting very adaptively in the face of this threat, and will no doubt take action if their confidence in their inflation targets erodes. Although increasing risks already require adjustments in global monetary policy, there does not appear to be a major deviation in medium-term expectations at this stage.


Source: Dünya Gazetesi by www.dunya.com.

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