The measures introduced by the Central Bank are not sufficient.

It appears that the decisions announced by the Central Bank of Turkey (CBT) will be highly debated. On Friday BRSA (Bank Regulation and Supervision Agency) also made similar regulations. This way the will to limit the rapid credit expansion was reinforced to a certain extent.

In my commentary on Thursday which I wrote when the details of the decisions were not certain, I said both the statements by Erdem Başçı, Deputy Governor of the CBT, and the highlights of the Financial Stability Report for December 2010 were in the right direction. And the decisions finalized in the direction I expected; my opinion did not change. Nonetheless, there is a considerable difference between the decisions' being 'necessary' and 'sufficient'. I think the decisions are in the right direction since they were necessary and required. But I do not believe that they are sufficient.

The element that will prove that decisions are sufficient would be tax regulations and similar measures that will discourage short term capital inflows just like those recently implemented by Brazil and South Korea. Of course such decisions will be made by neither the CBT nor the BRSA. It is the government that should take these steps; and the CBT is already aware of this fact.  The Financial Stability Report underlines that there are two policy options to be set against capital movements. The first is the discouraging measures such as tax disincentives. Second is the measures by the CBT and the BRSA to reinforce financial stability. These two options could have been effectuated simultaneously as complementary measures.  

Four reasons for not doing so.
There are four possible reasons why short term foreign capital inflows are not discouraged. First, decision makers might decide that such measures do not make a considerable disincentive effect. But research does not reveal a definite correlation in this direction. And even if it is given that such measures do not prove efficient; what harm could it cause to give them a try? They would at least improve tax revenues if not anything else.

Second, such measures are said to have adverse effects also on long term capital inflows. But if you do not prevent the outflow of the capital already in the domestic economy, which you actually should not, this thesis turns out to be invalid. What is more, in the current milieu of crisis where unusual conditions still prevail, such decisions are not cursed. Third possibility would be an ideological one. Decision makers might have faith in the superiority of the market mechanism. However the latest global crisis should have shaken this faith. So, this would be nothing but a blind faith.

Fourth capital flows, even if short term, buoys the domestic economy. A politician might attach importance to such buoyant climate especially on the eve of the elections.

All of these four motivations are equally possible. And I certainly do not know which one is valid to our case. But in the current milieu of crisis where things do not evolve as they were under usual and normal circumstances, policy makers had better think out of the box.

Durmuş Yılmaz: We have introduced measures in advance
Durmuş Yılmaz, Governor of CBT, spoke for the first time on the last week's Monetary Policy Board decisions which included the recent cut in interest rates. Below are the highlights of Yılmaz's speech at the panel discussion 'Monetary Policies' organized by Konya Chamber of Industry:

1 The recently announced additional measures were to prepare the economy to the new conjuncture which we believe will dominate the whole world soon.
2 In case of a severe recession, we might need much lower interest rates to establish financial stability.
3 In case of extreme economic expansion, an interest rate policy that controls inflation rate might fall short to prevent financial risks.
4 The new conjuncture will be characterized by intense capital inflows to reliable and dynamic emerging market economies leading to the risk of overheating, over-borrowing as well as asset bubbles in such economies.

IMF: The option to raise interest rates should be preserved.
International Monetary Fund (IMF) in the 2^nd Post-program Assessment underlined that the option to raise interest rates should be preserved against the risk of inflation. The assessment said:  "Conditions requiring an increase in interest rates may arise within the CBT's policy horizon, including the need to normalize real interest rates, particularly if direct tightening measures are not effective in protecting the credibility of the inflation target or preserving financial stability. Therefore, excessive comfort from the expectation that interest rates will remain low for an extended period should be avoided to discourage the financial and real sectors from lengthening their duration mismatches."

This commentary was published in Radikal daily on 19.12.2010