Let me insist that the forex intervention has only transitory effects. It cannot permanently modify an economy’s competitive position. This can only be made with policies that affect the real side of the economy. Monetary or forex measures can only have a temporary influence. The impact of a sterilized exchange rate intervention occurs via the currency portfolio composition. Because external and internal financial assets are not perfect substitutes, changes in their relative supply have an initial effect on prices, which then fades over time. The IMF’s latest Regional Economic Outlook for the Western Hemisphere presents estimates showing that interventions reduce the rate of currency appreciation. Additionally, it indicates that the effects are milder in more financially open economies, and shows that rule-based or discretional interventions have similar effects. Ours is rule-based, in order not to lose control over our monetary policy. As proven by this evidence, the effects would not be so different if our intervention had been arbitrary. This comes as no surprise, since the effects depend on both the amount of the intervention and the composition of the currency portfolios. It has called the attention of many people that a measure similar to that of 2008 has caused a different behavior of the exchange rate. I don’t need to say that the combination of events has also been different, especially abroad. Back then the world economy was headed to a severe crisis and risk aversion was growing. This eroded asset value in emerging economies and strengthened the dollar.
First, I will summarize the recent inflation developments, and then continue with the domestic and foreign demand outlook upon which we based our projections. In the second quarter of 2015, annual consumer inflation declined by about 0.4 points from end-first quarter to 7.20 percent, nearing the forecasts of the April Inflation Report (Charts 12 and 13). This improvement in inflation was mainly attributed to declining food inflation, while core inflation increased mostly due to exchange rate developments. In this period, the contribution of the food category to annual inflation was down to about 2.3 points amid a correction in food prices. Yet, the depreciation of the Turkish lira limited the decline in inflation. The ongoing cautious monetary policy along with prudent fiscal and macroprudential policies are having a favorable impact on inflation, especially inflation excluding energy and food (core inflation indicators). However, the lagged effects of the recent exchange rate developments delay the improvement in the inflation outlook. In fact, compared to the first quarter there was a notable deterioration in the underlying core inflation trend in the second quarter (Chart 14). This outlook was largely due to exchange rate-driven cost pressures that became stronger than that of the previous period. The cautious monetary stance and the moderate course of domestic demand continued to limit the spillover from cost pressures into prices. As we projected in the April Inflation Report, food prices exhibited a remarkable correction amid the climatic conditions that accommodated supply in the second quarter.