The CBT will stick to the high-interest rate policy as long as the developments across Europe disturbs risk appetite.

Now it’s almost the middle of the second quarter. The information at hand suggests that the Turkish economy has been growing at a significantly slower pace than in 2011, in line with the “soft-landing” scenario.

When assessing the industrial output figures for February, I said that seasonally and working day adjusted data must be handled with care. The last inflation report by the Central Bank of Turkey (CBT) has a useful box addressing this problem (page 57). According to their analysis, a slight change in the time frame of the series used for adjustment can lead to substantially different results. For example, according to the latest official adjusted figures, growth rate has been decreasing for the last four quarters. If adjustment is made at a slightly later date, however, quarterly growth hits the trough in the second quarter of 2011 and tends upwards then.

Credit supply picked up

One way to avoid this is to use the “old fashion” annual growth rates. According to this, pace of year-on-year increase in three-month industrial output has been decreasing since early 2011: 14.4, 8, 7.6, 6.5 and 2.8 percent. Will this trend persist? Or will the pace of increase tend up slightly by the second quarter as official estimates suggest?

Banks have increased the credit supplies lately. Eight-week average of lira loans grew weekly by 0.59 percent during the first half of 2011. Averages for July-October 2011 and November 2011-April were 0.41 percent and 0.31 percent, respectively. On the other hand, credit supply grew by 0.46 percent on average during the last five weeks. The change in the dollar loans is in the same direction, with a sharper increase in the last five weeks.

Results of the CBT’s survey of expectations signal a similar trend. In April, the difference between participants who declared a month-on-month increase and decrease in production capacity widened significantly. Similarly, optimistic accounts on the general state of affairs in the sector have been growing. Figures on the credit supply and the results of the survey give certain messages on the outlook in April and May but whether or not the signaled domestic demand boost will persist is uncertain. I can give at least two reasons:

First, Europe is on the brink of a new turmoil as signaled by the recent election results. Greek’s leaving Euro is on the agenda. Such developments have the potential to affect Turkey’s growth prospects negatively both by eroding exports and reducing access to external borrowing. The second one is about the hike in inflation. Though such risk is not reflected in the survey of expectations yet, reports suggest an upwards trend in inflation. Such trend might raise inflation expectations and then push up price and wage raises, in the end pushing inflation upwards further.

Will the CBT reset its goal?

Therefore, it is claimed that the CBT will concentrate more on anti-inflationary policies. The funding cost, the actual policy rate of the CBT adjusted on a daily basis, had an average of 9 percent since the beginning of April. If expectations deteriorate, the CBT can continue with the high-interest rate policy. also, the CBT will stick to the high-interest rate policy as long as the developments across Europe  disturbs risk appetite and thus puts an upwards pressure on exchange rates. Unless the CBT resets its goal and decides to focus on growth, of course. In short, in the light of the current developments and CBT policies, the possibility of a soft lending might weaken.

This commentary was published in Radikal daily on 15.05.2012