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Turkey: History repeating

4/9/2021

The inflation rate has accelerated to 15.6% y/y in February, as a result of TRY depreciation at the end of 2020. As the TRY just depreciated again, inflation should remain significant.

TRANSCRIPT // Turkey: History repeating : April 2021

CHART OF THE MONTH

FRANÇOIS DOUX

In our Chart of the Month, we will now talk about Turkey. The good news is that Turkish growth returned to pre-crisis levels in 2020: up 1.8%. To tell us more, we are here with Stéphane Colliac.

FRANÇOIS DOUX

Hello Stéphane.

STÉPHANE COLLIAC

Hello.

FRANÇOIS DOUX

Let’s talk about inflation. This is what is most alarming about the Turkish economy today, despite the strength of GDP growth in 2020, up 1.8%. This chart shows Turkish inflation, which has clearly accelerated, to 15.6% year-on-year in February. It was already as high as 11.9% in October. First question: what are the underlying reasons for Turkey’s high inflation?

STÉPHANE COLLIAC

The main reason that inflation is accelerating is the depreciation of the Turkish lira last fall. In the January edition of Conjoncture specialising on Turkey, we calculated that a 10% depreciation of the Turkish lira would have a 2-point impact on inflation after three months. We are right in the midst of this timeframe, and that is exactly what is happening.

FRANÇOIS DOUX

There was also talk about the role of economic policy, right Stéphane?

STÉPHANE COLLIAC

Yes. It has clearly played a role in the lag between inflation trends and exchange rates, and a combination of the two. Indeed, there are some other imbalances, not just inflation. The current account deficit rose to 5.1% of GDP in 2020. And monetary policy has been rather accommodating. This was not true all year long. After a new central bank governor was appointed last November, he raised the key policy rate by 875 basis points. As a result, the Turkish lira stabilised.

FRANÇOIS DOUX

One last question. After another new governor was appointed recently, what are the prospects for the foreign exchange market in the months ahead, and its repercussions on inflation?

STÉPHANE COLLIAC

The currency has come under pressure again since 22 March, when a new governor was appointed to head the central bank. This raises fears of that growth and foreign exchange rates will return to a period of “stop and go”. There will be phases of monetary policy tightening, because there will be little other choice, followed by phases when monetary policy becomes much more accommodating, which implies a general depreciation of the currency. The result will be a kind of yo-yo movement for the economic, forex and inflation cycles.

FRANÇOIS DOUX

Stéphane Colliac, thank you for this update on the Turkish economy and inflation. We will be back in a moment with Three Questions for Helene Baudchon on the zombification of the economy.

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