During the months ahead, we will witness the reflection of the inflation phenomenon onto the game. The CBT will keep the funding cost at high levels.

No, the title does not refer to the match-fixing probe of the Turkish Football Federation that turned into an unresolved mess. I am referring to the monetary policy implemented during 2011, excluding December. If you wish, the period can be extended to cover the last weeks of 2010, as well.

During the first four months of 2011, annual CPI inflation floated around 4 percent, below the year-end target of 5.5 percent. During the next four months, however, CPI went slightly beyond the target, floating around 6-7 percent. Starting with October, CPI tended to increase, reaching 10.6 percent by December. In the first quarter of 2012, CPI floated around 10.4 percent. In other words, inflation has been felt by the audience, that is, consumers.

Market interest rate at 9.7 percent

And here is what is happening on the “football pitch.” The Central Bank (CBT) has the ability to influence the market interest rate, that is, the interest rate appearing as a result of the short-term transactions between banks. Between 29 January and 3 August 2011, the Bank kept the market interest rate at 6.6 percent. Between 4 August and 19 October 2011, it allowed the rate to fall to 6.1 percent. Therefore, until 20 October 2011, the reaction against inflation was not reflected onto the game.

On 20 October 2011, the CBT raised the upper limit of the interest rate corridor to 12.5 percent, signaling a monetary tightening. From that date to April 2012, average market interest rate stood at 9.3 percent. The rate encountered a second wave of increase in the last couple of weeks. Average market interest rate in the recent period, marked by the CBT’s statements on an additional monetary contraction, reached to 9.7 percent (12 March 2012–30 April 2012).

I have no idea how it can be identified whether or not match-fixing attempts have been reflected on the game. After all, absurd goals are conceded or clear chances are missed all the time. Teams that do not have much to win or lose in particular do not fight much during the game. So it is difficult to decide which match was fixed. But it is much easier to identify it the monetary policy was able to influence the game. 

‘It indeed influenced the game.’

Some of you might oppose that the CBT initiated monetary tightening way before October 20^th, by successive attempts to raise the required reserve ratio. Instead of explaining at length why those attempts could not succeed unless the Banking Regulation and Supervision Agency stepped in, I will directly refer to the reports and declarations by the CBT. For example, the last inflation report of the Bank states that the monetary tightening was initiated in October 2011. Also, it points at the risk that CPI can stand at high levels until the last quarter of 2012. The CBT stresses that such developments were reflected on the pricing behavior and wage negotiations affecting inflation expectations negatively and that these might push up inflation further. Therefore, it maintains, additional monetary tightening measures are necessary.

During the months ahead, we will witness the reflection of the inflation phenomenon onto the game. The CBT will keep the funding cost, that is, the actual policy rate, at high levels and let the short-term interest rate float within a high interval. If the upwards pressure on exchange rate intensifies, the CBT will sustain the high-interest rate policy longer, which will cause the market rate and the policy rate get close to the upper limit at 11.5 percent. If exchange rate tends to decrease or remain constant, the high-interest policy will last shorter or the interest rate will be lowered slightly. We must also note that the CBT will be willing to allow the exchange rate to increase to some extent and that this preference will be applicable until the CBT ensures that the year-end inflation will be close to the targeted 6.5 percent. So, the changes in inflation dynamics have finally started to influence the game!

This commentary was published in Radikal daily on 03.05.2012