A former official has accused the Turkish Statistical Institute (Turkstat) of manipulating inflation data, Ahval reported on Wednesday.
Turkey’s last inflation report in July was at 18.95 per cent. This is just below the level of key interest rate at 19 per cent. The governor of the central bank, Sahap Kavcioglu, has committed to raising interest rates if the rate of inflation increases above the key rate of interest.
A number of economists have expressed concern about the inflation report, as it has enabled the central bank to hold interest rates at current levels.
Ahmet Takan, a former official with the office of the Turkish prime minister, accuses Turkstat of manipulating inflation data to keep it below the key rate of interest. He cites documents he has obtained.
“The compiling of inflation prices is now done with tablets, they are sent to the centre immediately, but if a high inflation rate in a specific sector is noticed, they immediately call the regional manager and ask for corrections, or if the items have increased too much, they send items with an Excel file and ask for correction.
For example, it can say “Don’t use stationery increases, enter in September.” The increase that may occur in two months is reduced to a single month. The weight of one element in the material basket can be made greater than another. As a result, price increases are minimised.”
According to Takan, TurkStat has transferred to more junior positions nine top regional officials who refused to manipulate data for inflation in July.
TurkStat has formally denied all of Takan’s accusations.
Why is all this done? Because Turkish President Recep Tayyip Erdogan is determined to reduce interest rates as soon as possible. Erdoğan believes, against all accepted economics, that rate hikes are inflationary.
“High interest will bring us high inflation, but low interest will bring low inflation. August is the breaking point, and with August, we will hopefully move to low inflation,” Erdoğan told news channel AHaber in an interview on Wednesday. Higher interest rates are recognised as a key tool to battle inflation, according to traditional economic theory.
The Turkish lira has remained at more than 10 to the euro for months – the record low is 10.53. The lira has also fallen to 8.67 to the dollar, close to the record low of 8.8.
“With analysts expecting inflation to continue rising, upcoming Turkish central bank monetary policy meetings will continue to pose event risk for lira traders,” said Simon Harvey, a senior currency analyst in London at Monex Europe.
Timothy Ash, senior strategist for Emerging Markets at Bluebay Asset Management, described the central bank’s latest move as “clearing the deck to cut at the first opportunity.”
“Inflation is rising, the current account is widening, and reserves are falling,” he wrote in a note Thursday. “How can the central bank cut without sacrificing the lira?”
Analysts noted, however that, in the Turkish central bank’s report on monetary policy, language that referred to tightening monetary policy had been removed. Such language had figured in all the reports in recent months.
“We think that the removal of the tightening bias against rising inflation expectations suggests that the Turkish central bank now has a more dovish reaction function,” Goldman Sachs wrote in a note to clients on Thursday, meaning that there is greater reason to expect an interest rate reduction.
Should Erdogan force an interest rate reduction in September, as most analysts expect, a sharp drop in the value of the lira against major currencies is most likely. There is also likely to be pressure on the lira if the US Federal Reserves starts its taper on asset purchases, a move that will bring much investment back to US markets and hurt emerging markets.
A low-valued lira is an important current of inflation, as it pushes import prices higher. If there is no concomitant move higher in the inflation report, there will be serious concern among economists about the data Turkstat is preparing.
Primarily because of Erdogan’s pressure on the central bank to keep interest rates at the lowest possible levels, Turkey has the highest inflation in Europe. It has the second-highest rate of inflation among emerging markets, just behind Argentina. It has the 13th highest inflation rate in the world, ranking it between South Sudan and Nigeria.