Some domestic and foreign economists who cannot grasp what economic growth means for the Turkish economy in terms of its economic-political front are obsessed with the Turkish economy's growth performance, and even more strangely, stubbornly link the most recent developments in our economy, such as extreme exchange rate movements and the consolidation of inflation, to growth. They have even created an expression for this: Turkey should stop with "growing no matter what." If Turkey's growth dynamics will cause an inflationary effect, this should be based on demand inflation. However, Turkey's economy has been experiencing cost inflation pressure for more than one-and-a-half years - 20 months to be more exact. The primary reason for this is not the exchange rates. To eliminate the effects of the July 15 coup attempt on public fiscal discipline, we have seen that the producer price index (PPI), an indicator of cost inflation, is starting to rise with additional measures to increase public income.

At the same time, while global oil prices started in 2016 at under $30, the price of a barrel of oil rose above $50 a barrel around 18 to 20 months ago, and take into account the cost inflation effect of the rise in oil prices. In the last four months of 2016 and all of 2017, Turkey was unable to effectively manage the fluctuating prices of raw materials and semi-finished products; tax and non-tax normal income adjustments made in the name of fiscal discipline and additional taxes and restrictions imposed on imports also had an amplifying effect on cost inflation. In the meantime, following the coup attempt, while the exchange rate was under control with the $15 billion worth foreign currency accounts that were cashed thanks to the Turkish people, with Moody's controversial note downgrade, the activity in exchange rates increased and this rise triggered and fed cost inflation.

Turkey continues its growth path that positively contributes to fiscal discipline, employment and to economy's dynamics. The claim that Turkey wants to "grow no matter what" can only be brought forward if it has any contribution to the inflation trends over the last one-and-a-half-years. Turkey's growth based on investment in mega projects, private sector dynamism and net exports should be well read. With the political stability to be attained after June 24, while the share of public investment expenditures on growth will relatively go down, the new leap in private sector investments will bolster the contribution of growth in the fight against inflation. It would be highly beneficial to understand Turkey's macro problems, cost inflation and current account deficit to keep Turkey on a path of growth. Cost inflation and the current deficit will be solved by major structural reforms.

‘Bazooka' operation

from the CBRT

With the current foreign exchange rates and general pricing habits shifting, the "bazooka approach" is one of the most prominent tools that central banks have. With this approach, the central banks annihilate confusion, low morale and uncertainty from the markets by using the monetary policy tools at hand. The U.S. dollar-Turkish lira exchange rate that was TL 3.78 on Feb. 26 after testing over TL 4 on March 28 and April 4, increasing almost 90 cents in one-and-a-half months. It was below TL 4.25 on May 10, especially over the last two weeks. Its 10-15 cent bounces in Far East Asian markets while the domestic markets were closed, especially during the night connecting May 22-23, led it to rise to TL 4.90 from TL 4.65. These fluctuations naturally instigated the Central Bank of the Republic of Turkey (CBRT) to take action; thus, they increased the late liquidity window lending rate from 13.5 percent to 16.5 percent.

The CBRT, with this move, has confirmed its determination in contractionary monetary policy that has been pursued due to the inflationary period that Turkey is going through. At the same time, this move has confirmed and strengthened President Recep Tayyip Erdoğan and Prime Minister Binali Yıldırım's stance on the CBRT's "independence in decision making" on a global scale. Specifically, the emphasis Erdoğan put on the resolute and sensitive continuation of the country's commitment to global governance principles in economic policies - which have been successfully implemented within the 16-year Justice and Development Party's (AK Party) rule and have been praised numerous times on a global scale - has strengthened the CBRT's move.

At this point, let's not forget that benefiting from the wiggle room in public income regarding the necessary savings made in public expenses with prioritization and the steps to decrease cost in favor of the real sector with respect to tax and nontax revenues will both make positive contributions to the effectiveness of fiscal policies and the fight against cost inflation. Supporting the CBRT's move with fiscal and import policies that will ease the real sector and by rapid action that will erase the manipulation of foreign exchange regime change out from minds, would expedite the downward trend in exchange rates. If the real sector's foreign exchange demand that has been withdrawn on before maturity is cooled down, we can shortly observe the rapid effect on the exchange rates.