Key takeaways from the Turkish Central Bank's recent address

First of all, let me state that prior to yesterday's presentation by the Central Bank of the Republic of Türkiye (CBRT), I hadn't watched or found any of their last five presentations worth following.

As it was Governor Erkan's first presentation, I followed it with curiosity, as she took the stage to explain credit. On this occasion, I want to congratulate her on her new position and express my heartfelt prayers for her success.

Overall, the presentation gave me the impression that Governor Gaye has conducted a good analysis of Türkiye's financial situation, looking at it objectively and with analytical methods, and seems to have a good grasp of the overall picture.

This is significant for a reason: the primary expectation from Central Banks is "forward guidance," meaning guiding the future. As the central bank has all the data and is the rule-maker, its influence on the entire economy is substantial. Therefore, determining the direction for the future is of utmost importance for the central bank. However, for this direction to be effective, the market must believe in it and find it credible.

Governor Gaye's observation that the complexity of the financial structure, which she characterized as "more than 100 steps," creates a knot, is crucial. In this context, her effort to untangle the knot gradually, through analytical methods and impact analyses, is indicative of a more solid foundation for the financial structure.

I won't go into details, but based on the key takeaways and CBRT's findings, some of my remarks are as follows:

- The CBRT expects strengthening inflation in June due to robust domestic demand, wage and exchange rate developments, and rigidity in service inflation.

- Considering the impact of tourism, the rigidity in service inflation and the increase in wages along with the surge in tourism demand results in higher price pass-through.

- The data for the second quarter of the year, such as the Retail Sales Volume Index, domestic card spending, and turnover indices, indicate that the strong performance in economic activity is primarily driven by domestic demand, raising awareness of overheated consumption spending.

- The rising plans of durable consumption expenditures by consumers in the second quarter, particularly for automobiles and white goods, indicate that the issue is not related to supply but rather the overwhelming demand.

- While the domestic demand outlook suggests a strong total demand condition, the total supply appears to be more moderate, indicating that the credit mechanism used in expansionary policies is not sufficiently turning towards production.

- The CBRT anticipates that selective credit tightening decisions will balance domestic demand.

- Closing the output gap will be a significant component of the disinflation process, implying that efforts will be made to restrict domestic consumption as production capacity cannot increase immediately.

- Despite the significant reducing impact of energy prices, our imports increased by more than 4% to reach $185 billion in the first six months of 2023, owing to the rapid growth in domestic demand.

- Due to global developments, credit expansion, and uncertainty perceptions, gold imports increased by approximately $11 billion in the first half of the year compared to the same period of the previous year, surpassing the previous year's level by more than three times.

- Due to the acceleration in domestic demand, consumer goods imports increased by more than $8 billion, reaching 1.6 times the amount of the previous year.

- For the second half of the year, we expect significant improvement in the current account balance due to the effects of monetary tightening and service income channel.

- Strong domestic demand affects inflation and exchange rates through both direct and current account channels. The impact of exchange rate developments on inflation occurs through various channels such as cost, balance sheet, and expectation.

- Studies suggest that exchange rate pass-through may be around 25%.

In most of the points, it is explicitly stated that the problem stems from domestic consumption-oriented expansion. The inference that the current account deficit is based on domestic consumption-oriented imports is a general consensus. Therefore, it is clear that import-oriented businesses and sectors will experience slowdowns in the coming period.

One point that hasn't been addressed, in my opinion, is whether domestic consumption was driven by necessity or investment motives. What does CBRT data say with regard to this issue, and what is President Erkan's view on this matter?