Fatih Özatay, PhD - [Archive]

Even if the policy worked… 06/12/2012 - Viewed 1774 times

Credit growth rate started to decrease almost a year after the CB’s interventions and two quarters after the latest intervention

Annual consumer price inflation in November was below expectations, including that of the Central Bank of Turkey (CB). This probably gave a sigh of relief to the CB. So, both the CB and those who feel the urge to defend the CB no matter which policy it implements can take the time to pay attention to critical accounts so that critics can prove productive. Criticism should best be done in good times, we might say.

Last Tuesday, I once again tried to show that the CB’s policy to raise reserve requirements starting with the last quarter of 2010 did not work. The latest intervention was in April 2011; the required reserve ratio was raised slightly. The major rises in the ratio were introduced in January and March 2011. Nevertheless, after the peak in the fourth quarter of 2010, credit growth rate either further increased or remained the same during the first three quarters of 2011. Credit growth started to weaken almost a year after the CB’s interventions and two quarters after the latest intervention. Meanwhile, the Banking Supervision and Regulation Agency increased reserve requirements on loans in June 2011, global uncertainties climbed due to the crisis in Europe starting in August 2011 and the CB substantially increased short-term interest rate a few weeks later. Assessed together, those three would be expected to lower credit demand as well as credit supply.

Telephone diplomacy

In the light of the developments above, it is reasonable to associate the drop in credit growth rate in the last quarter of 2011, months after the CB’s reserve requirement interventions. In addition, “telephone diplomacy” might have been carried out. Let me set all these reasonable causes aside and concentrate on the major criticism my argument could receive: “the repercussions of economic policies don’t arise immediately but extend over time. From this perspective, it is natural that the raises in required reserve ratio did not immediately enable drops in credit growth rate.” Then, please answer this question:

If raising required reserve ratio yields results earliest in 6-7 (or 9-10) months, is it a healthy policy preference to begin with? Please consider this in the light of (1) the present era under extensive financial globalization, implying that monetary policy changes in developed countries immediately affect Turkey and its peers and (2) current abnormal conditions marked by severe uncertainties about the future of the world economy and financial markets.

Please read the question from this perspective: the monetary authority was of the opinion that the circumstances required a policy change. So, it altered the monetary policy. When the new policy was about to yield results (of course under the assumption that it will prove fruitful whatsoever) conditions changed in the opposite direction. So that if those circumstances were in place from the start, it wouldn’t consider altering the policy framework in the first place.

By the way, I previously talked about the special issue of the journal İktisat, İşletme ve Finans (June 2012) devoted to a discussion on the new CB policies. The issue involved an inspiring article by Yıldız Akkaya and Refet Gürkaynak of Bilkent University. Gürkaynak was until recently advisor to the CB. During Saturday’s commentary I want to quote from the study. And here is a provocative question for the one after: or was it the conventional interest rate policy alone that yielded results?

This commentary was published in Radikal daily on 06.12.2012