If the CBT aims to ensure price stability and financial stability at the same time, it must deliver remarks separately in relation with these two purposes.

On Saturday I tried to write an empathetic article and understand the recent steps of the Central Bank of Turkey (CBT). I want to confess that I made a lot of effort to write that article. The reason is obvious, I guess: The CBT cannot express itself correctly. Let me give a couple of examples.

The first example is about credit supply. The CBT used different methods of measurement at different times for the pace of the increase in credit supply. What is more, the intervals were quite short. Among these methods were taking weekly moving average of annual paces of increase, and comparing this average with the average annual pace in previous years. If you employ two different methods of measurement for an important macroeconomic indicator, won't people ask what is going on? And they did. Some investor reports are about to go as far as opening bets for the new method of measurement for the CBT.

Two decisions on foreign exchange

The second example is on the reserve requirements for foreign exchange (FX) deposits. The President of the CBT stated during the presentation of inflation report on July 28^th said that the Turkish lira (TL) had been depreciating "as desired" against FX since November 2010 and that this distinguished Turkey from other emerging market economies which witnessed appreciation of currency. In response to a question, he said that they were content with the current level of exchange rate and that the TL could no longer be called as overvalued. This was a verbal intervention in response to the rapid depreciation of the TL a couple of days before this speech.

In that couple of days, the CBT announced two different decisions to reverse the rapid upwards movement in the exchange rate. With the first decision on July 25^th, it ended FX purchase auctions and with the second decision it reduced reserve requirements for FX deposits. The statement said that the objective was to "promote the extension of the maturity of liabilities across the banking sector". The last sentence of the announcement said, "Thus, liquidity amounting to approximately USD 590 million will be provided to the market."

The statements are inconsistent

The above sentences are inconsistent. If the CBT aims to expand the maturity, why does it touch upon providing liquidity to the market? The chief objective is evident when the ceasing of FX purchase auctions as well as the above remarks of the President of the CBT is considered. As a matter of fact, on August 4^th, the Monetary Policy Committee held an extraordinary meeting due to the sudden increase in global risk perception. Then, FX sale auctions were reinitiated and reserve requirements for FX deposits were cut again.

As you can note, these decisions are not inconsistent. The inconsistency lies at the announcement dated July 25^th which claims that the reserve requirements were cut in order to "promote the extension of maturities". This is an evident failure of communication. The CBT should not make such mistakes in a milieu in which the CBT itself is more concerned than markets about potential developments.

Finally, I would like to say that I will dig deeper in the issue I was concerned with last Saturday: Given that the CBT's aim is to ensure financial stability and price stability simultaneously, I believe its steps will be more understandable if it made separate remarks in these two categories. For instance, misunderstandings would mostly evaporate if the recent remarks on growth were expressed separately in relation with financial stability and with price stability. This is a strategy worth considering.

This commentary was published on Radikal daily on 09.08.2011