We then came to discuss that inflation targeting regimes must aim to promote financial stability as well as focusing on the inflation and the production gap.

After I sent my commentary that criticized the accounts that considered the latest decisions by the Central Bank of Turkey (CBT) to be a "surprise", I came across to the articles of two commentators I like and follow: one on that day in the Dünya daily (Taner Berksoy) and the other in the day after in Radikal daily (Servet Yıldırım). They both argued that the CBT's decision was a surprise, too. Their interpretation of the decisions as a surprise followed from the fact that some officials said new decisions will not come until the end of March.

It is always useful to assess the issues from different aspects. It appears that I had forgotten this principle while I was writing my commentary the day before in which I responded to the accounts considering the decisions as a "surprise" with an approach reading "God give me patience". In the end, I appeared as if I was pitting against my friends, even though I wrote the commentary before theirs were published. My thesis was based on the previous issues of the texts issued a couple of days after the Monetary Policy Committee meetings with detailed remarks on the meeting. Berksoy and Yıldırım based their theses on the statements by CBT officials.

Let me try to justify myself anyway: First, let me stress that the decision was announced on March 23, almost the end of March. Second, let me emphasize that such monetary policy decisions are taken by the Monetary Policy Committee and thus the body that should be taken into account is the committee itself.

Breaking the routine is as important as approaching to a single issue from different aspects. Turkey had met the inflation targeting regime in early 2002. The regime, though was on the agenda in a couple of the preceding years, had not been implemented until 2002. It first had the characteristics of "implicit" inflation targeting back then and was transformed into an explicit targeting regime in 2006. The implementation procedure did not change radically from 2002 to 2010. Therefore, there emerged a monetary policy framework that remained in effect for a long time and thus everybody got used to it.

Since high inflation rates ruled the period before 2002, the only objective emphasized in the first years of the implicit inflation targeting regime was price stability. The difference between production and potential level of production (output gap) was therefore thrown out of the focus. In time, inflation rate was lowered to single-digit levels after which the focus put on the output gap grew. Along with the adverse affects of the global crisis on unemployment and production level, these phenomena came to the fore. My argument that the implementation process did not change radically takes these alterations into account.

But in 2010, the circumstances started to change. High current account deficit became to be financed predominantly by short term capital inflows. This phenomenon resulted from a practice the end of which could not be foreseen, though was known to be temporary: developed countries efforts to keep interest rates at low levels and money supply at high levels had an important role. Simultaneously, a rapid credit expansion was observed in Turkey.

The circumstances have changed
The global crisis had proven that rapid credit expansion can be much dangerous if it is driven by the practices mentioned above, the end of which cannot be foreseen. We then came to discuss that inflation targeting regimes must aim to promote financial stability as well as focusing on the inflation and the production gap. This was one of the agenda items in an IMF conference held two weeks ago, for instance.

In such a milieu, would not it be awkward if the inflation targeting regime was maintained with no alteration? In this sense, did not the CBT need to break the routine going beyond the old monetary policy regime? There are some critical questions to answer. First; is the previous monetary policy framework compatible with the new circumstances? Second; if it is not, what must be the new framework to draw? Third, if it is compatible, what policy do you recommend to prevent the short term capital inflow and rapid credit expansion that can harm the stability in the future and to stay in line with the inflation target?

This commentary was published in Radikal daily on 29.03.2011