The Monetary Policy Board might decide to narrow the interest rate corridor in its extraordinary meeting today.

My book "Financial Crisis and Turkey" was published in December 2009 (Doğan Kitap). The fourth chapter of the book is on the global crisis. It is titled "The Global Crisis: 2007-(?). The title has a question mark since the crisis had not ended by December 2009 and it was not certain when it will end. In April 2011, the third edition of the book was published. Though I added a new chapter and revised the other chapters in this edition, I did not change the title of the fourth chapter. The end date of the global crisis is still denominated with a question mark.

If the new edition was to be published today; I would still stick to the question mark since huge uncertainties are rising both in the US and the European Union (EU). The process display severe fluctuations. At one point, you see that uncertainties are on the rise and the global risk perception is worsening. A moment later, important decisions come from the relevant countries and the uncertainty clouds clear away.

The problems of the Europe persist

The EU's recent decision on Greece long afterwards raised the perception that the European leaders have finally decided to take action. This was a promising development given the extreme risks that have been accumulating in the continent. This was not a universally accepted view; however, many thought in this direction. I also was in this group as I have mentioned in my recent commentaries. Similarly, it was expected that the "conflict between the Republicans and the Democrats" will eventually end and the borrowing ceiling in the US will be increased before August 2. The expectations proved correct.

As you might have noted, however, the mentioned decisions from the EU and the US do not sweep away the problems. They just eliminate the "immediate" uncertainties but fail to influence those of "tomorrow". Fundamental problems facing the peripheral European economies continue. In fact, concerns about Italy have intensified. What is more, US's finally enacting a law that allows more borrowing is evidently not a long-term solution for the country which already has very high budget deficit and which faced a substantial increase in public debt during the global crisis. Certain articles of the law are tailored to reduce the budget deficit; however, the main debate was as to how the deficit must be reduced. Even if the aim to decrease budget deficit is met, the "awkwardness" I have stressed remains intact. What is more, signals coming one after another indicate that the US economy is to slowdown.

Risk perception rises

The last couple of days proved that global risk perception has risen. The value of dollar-euro basket against the Turkish lira has increased. Such milieu evidently affects Turkey. The President of the Central Bank of Turkey (CBT) made a speech at the inflation report release meeting on July 28, 2011. The speech can be accessed on CBT's website. Below is a quotation from the presentation:

"We stated previously that we might gradually narrow the interest rate corridor in the case that concerns about the public debt problems of some European countries and about global growth continue to affect the risk appetite negatively. Moreover, I would like to stress that if that the problems of the developed countries intensify and that the domestic economic activities slowdown, we might have to use all policy tools for an expansionary policy attempt."

The Monetary Policy Board will make an "interim meeting" today. This can also be read as an extraordinary meeting. The President stated that the lira was no longer overvalued given the last increases in the exchange rate. This emphasis, the recent upwards trend in the exchange rate and the above quotation indicate that the meeting will bring a decision to narrow the interest rate corridor. We can expect a substantial increase in the borrowing interest rate. What the upper limit of the corridor can be dealt with in another article since the aim to slowdown the rapid increase in the credit supply blurs the picture (the CBT might need some room to maneuver). Will the CBT at the same time reduce the policy rate slightly? As the above quotation argues, the CBT plans to take such step if domestic economic activities slowdown, which is not the case yet.

This commentary was published in Radikal daily on 04.08.2011