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    The sin of CBRT

    Fatih Özatay, PhD26 December 2010 - Okunma Sayısı: 1046

     

    What are the risks incurred by the latest TCMB decisions?

    With latest decisions the Central Bank of the Republic of Turkey (CBRT) has been trying to establish a monetary policy framework in the context of the changing circumstances that regards price stability together with financial stability as far as its Law allows. I have underlined in my recent commentaries that the CBRT is doing the right thing in highlighting financial stability alongside the price stability in the face of highly uncertain global circumstances. So now it is time to highlight the potential risks.

    The first goes as follows: CBRT's decision to ease the fever of the credit market was accompanied with interest rate cut. I am not trying to discuss whether or not the decision was right; let us assume that it was the right decision. If you are unable to explain the motive of a monetary policy practice that you think is right, the implementation would not generate the desired outcomes since you cannot shape expectations in the direction you planned. However, expectations channel is one of the most important channels through which monetary policy affects the economy. 

    It is important to be understood
    There is one important lesson I, as a former CBRT official, learned during my duty at the Bank and has been sharing with senior CBRT officials since then: 'Do not make any decision that you cannot explicate. So if you have to take the decision in any case, make sure that it is understood." But I believe that the justification for the interest rate cut was neither explicated nor understood.

    The second risk is that, even though decisions in this direction will continue, which is told to be the case for similar decisions, it is still likely that they will prove ineffective. This is for two reasons: first, the Bank Regulation and Supervision Agency (BRSA) shall also take efficiently decisions in the same direction. In fact, it has taken similar decision so far. And the supplement decisions to be taken by the CBRT shall be backed by following BRSA decisions.

    The second reason pushing up the risk of ineffectiveness is that no step is taken to disincentive short term capital inflows. Decision makers are somehow reluctant to and afraid of doing this. However given the current global circumstances, such decisions are not cursed or blamed.

    There goes the contradiction: When altering the monetary policy significantly and highlighting financial stability as a phenomenon as important as price stability, the main justification the CBRT relied on was the changing global circumstances. The Bank did the right thing as it altered without hesitation the monetary policy implementation framework that fit the earlier circumstances but would apparently fail to satisfy the existing conditions in line with the change in global conditions. On the other hand changing circumstances also necessitate decisions that would discourage short term capital flows, which are not taken yet. 

    Blind faith
    The CBRT is also guilty for this discrete contradiction. Yes, it is not the CBRT that is supposed to take such decisions. But in the context of the new CBRT law, it has the responsibility to counsel the government which it does not fulfill. It is probable that the sole reason for this is it thinks such controls are in contradiction with market economy. But the problem is that opinions deemed to have emerged within a wise framework might turn into blind faith due to forgetting the assumptions made in setting that framework and thus failing to question whether or not the assumptions are still valid. The crisis has proven how blind faith can lead to big troubles.

    It is blind faith to say 'I will focus on price stability no matter what'. But 'I will never do anything against capital movements' is also the product of blind faith. It is dangerous as a whole and it should be avoided.


    This commentary was published in Radikal daily on 26.12.2010

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