Gizem Haydaroğlu
With the October interest rate decision just days away, news about CBRT policies and inflation has once again taken centre stage. As another eagerly awaited Thursday approaches, I want to address a few topics that I frequently encounter but realise are not widely known, to better understand both the functioning of the markets and monetary policy.
Firstly, the primary objective of the Central Bank of Turkey is to ensure price stability. To this end, it regulates monetary and exchange rate policies and controls the money supply by providing liquidity to the market. Emission refers to the amount of banknotes in circulation. All these decisions, together with the policy interest rate, which is one of the main instruments of monetary policy, are determined by the Monetary Policy Committee (MPC) within the Central Bank.
When interest rate decisions are made, it is not only the current economic situation that is taken into account; rather, the aim is to create a long-term climate of confidence. The ‘Control Horizon’ is used to establish a predictable plan for this period. Although it may sound like the name of a military operation, the meaning of the Control Horizon is not quite so glamorous, but we can still talk about an economic operation. The Control Horizon refers to the period required for updates to policy interest rates to affect inflation. It is generally set between 12 and 24 months. For Turkey, this period is accepted as 12 months.
As we know, inflation has been a persistent problem in Turkey for years. Considering the sudden effects that the dynamic political environment has on the markets, it is not easy to predict how strictly policies will be implemented during the disinflation process, or even their direction (expansionary or contractionary).
It is possible to say that the phenomenon of disinflation, which we frequently encounter in the Central Bank’s public statements, is an important topic in decision-making processes. Disinflation can be defined, in the simplest terms, as the slowing down of inflation. To put it more formally, it means a decrease in the rate of price increases. The Latin prefix “dis-”, which conveys a negative meaning, when placed before the already sufficiently negative phenomenon of inflation, results in a relatively positive term.
Speaking of the negative effects of inflation, it is also necessary to mention what kind of cost this entails. In Turkey, we see the effects of inflation in both the social and economic spheres. The concept of Kösele (Sole) Cost has emerged in this regard. As money loses value day by day, individuals will want to invest their savings in the bank rather than holding cash, and they will be forced to go to the bank constantly whenever they need money. The shoes worn out from this constant going back and forth create the Sole Cost. Fortunately, with advancing technology, the Sole Cost has now largely been replaced by increased screen time in internet banking applications.
Approaching the targeted inflation rate for our country can only be achieved through strong policies. Reducing the public deficit, resolving structural problems, and curbing fluctuations in exchange rates are among the most important steps to be taken in addressing macroeconomic instability. We hope that the interest rate decision to be announced on Thursday will have a positive impact on this process, protecting our markets, our soles and our screen time.