Can inflation be brought under control by being swept under the rug?

As foreign exchange rates skyrocketed and concerns heightened due to higher interest rates caused by deteriorated expectations, an economy summit was held at the Beştepe Presidential Palace.

Before the summit, the Central Bank raised the limit for the “swap” auction amount to $1.5 billion from $1.25 billion to curb the lira’s fall. But the situation was totally different; participation in the auction was very low. Nobody wanted to participate in a tender where they would borrow the lira at 13.5 percent and lend to the Central Bank at 13.5 percent. The market interest rate was above this. The amount in the auction declined to as low as $25 million.

Is the Central Bank really far from the realities of the market? It is enough to look at the money market to see that the interest rate on the lira is not high enough? The bank managers were simply “spinning their wheels,” for the sake of saying “we have taken the necessary measures” in a market where market interest rates are above the bank’s own interest rates.

“The central bank will continue to use the tools at its possession effectively,” read the statement released after the summit. The problem is that the bank does not and cannot use the main tool at its possession.

That is why many rumors regarding the foreign exchange regime and capital movement are spreading through “the grapevine” as people speculate that authorities can only solve problems with those tools.

In the face of those rumors, the statement from Beştepe responded that “[the authorities] will remain committed to open market policies. No measures other than market mechanisms, including the forex regime, forex deposit accounts, are considered.”

This a response to the people who think interest rates are not raised to protect the value of the lira because of political pressure, thus the increase in forex rates can only be stopped through “non-market measures.”

“Necessary measures will be taken to decrease the pressure on interest rates and exchange rates, and in turn battle more effectively with inflation,” the statement released after the summit said.

Speaking in Istanbul ahead of the Ankara summit, Deputy Prime Minister Mehmet Şimsek said “we had entered a period where inflationist pressures would ease.”

At around that time, a report by Selçuk Altun for daily Dünya suggested that “The Energy Market Regulatory Authority (EPDK) has had meetings with distribution companies and persuaded them not to increase the price of oil.”

According to a report by Derin Gökçe in daily Sözcü, the board of the Petroleum Products Employers’ Union (PÜİS) decided that the changes in the prices would not be announced on its website. It means people will learn about price hikes or falls only when they go to gas stations to buy oil. 

What is the situation with prices?

The price of Brent petrol and domestic fuel prices at the pump move within a band of 5 percent in the medium term, but it is observed that the difference between the two prices are widening, and is moving towards over 15 percent. “The automatic pricing mechanism” would pass on the changes in international markets to the prices at local pumps within this band.

However, as Devlet Bahçeli, leader of the Nationalist Movement Party (MHP) on April 17 called for snap polls, the difference between international and local prices has widened. The price of Brent oil increased by 10.7 percent to $76.4 per barrel between March 29 and May 9 while the domestic prices of gasoline and diesel oil have risen 1.5 percent and 4.5 percent respectively. But we have a problem here, the lira has depreciated by 7.4 percent against the United States dollar over the same period. When, in terms of the lira, the price of one liter of Brent oil has increased by 18.9 percent, the domestic price of fuel oil cannot possibly rise 1.5-4.5 percent. This is only possible if someone says “no, do not raise the prices.” This roughly 10-15 percent difference between the international and domestic prices will eventually narrow. 

When all of this happens, it is difficult to keep inflation and inflation expectations at “low levels.” It is no secret that the price hikes that are currently put off will roll in like a snowball after elections. Moves to keep the inflation under control may impress some voters but they will adversely affect the economy, pricing and confidence.  Necessary measures “to battle more effectively with inflation” should not be done by sweeping the problems under the rug.