The rationale of the decisions of the CBT could not be understood. Therefore, one fails to estimate in which direction which tool will be employed next.

It was assumed that once the price stability is achieved; financial stability will come automatically - evidently with the contributions of the micro regulations to be introduced by other relevant institutions. This belief became to be questioned frequently after the global crisis. Experts started to stress that central banks should launch a monetary policy perspective that guards price stability and financial stability at the same time. However, there is no theoretical framework about how to implement a monetary policy that will secure both price stability and financial stability. There is no experience in this regard, either. This lack of theory and experience challenges central banks that seek for new strategies out of the orthodox monetary policy framework. They do not know what to write or how to express the circumstances. The challenges facing central banks seeking for a new policy framework will become more evident when you look at the publications on this subject for central banks which used to implement inflation targeting regime.

The Central Bank of Turkey (CBT) is among those seeking for a new policy framework, and is a leading one. Therefore the mentioned challenge is felt also by the CBT. The presence of the challenge renders the complex messages to some extent understandable but on no consideration justifiable given the current milieu of uncertainties. Remarks by the CBT officials and official reports gave the impression that the CBT has multiple objectives. This impression is actually the underlying reason for intensive debates on the CBT's policies and extensive efforts made to understand the objective of the policies. The CBT has highlighted several different indicators in recent months:

Current account deficit, pace of increase of the credit supply, value of the Turkish lira against foreign currencies (exchange rate), consumer price inflation, core (headline) inflation, short term capital inflows. We have been hearing remarks on each of these indicators since November 2010. This blurs minds. The rationale of the decisions could not be understood. Therefore, one fails to estimate which tool will be employed next and in which direction. When the sole objective of the CBT was to achieve price stability and inflation targeting was the tool employed, reports of the CBT always focused on the current and potential changes in macroeconomic fundamentals with relation to the future level of inflation. Current account deficit, exchange rate or the pace of increase of credit supply were important also back then. Massive short term foreign capital inflows were worrisome, too. The CBT used to analyze the possible movement of these indicators in the future or the fiscal policy responses. These analyses, however, chiefly aimed to identify the future pathway of inflation and the extent to which this pathway is in line with the inflation targets and to share the outlook with the public. Communication with the public was built on the influence of these variables on inflation. In this parallel, the CBT tried to give public a clue about the future path of short term interest rate, the only policy tool at disposal back then.

Given that the new policy of the CBT aims to achieve price stability and financial stability at the same time, the steps of the CBT will be more understandable if it made remarks in line with these two objectives. For instance, "yesterday"s remark was as follows: "We do not want the rapid credit expansion to aggravate the non-performing loan problem and harm financial stability in times of economic slowdown. Therefore, we are increasing reserve requirements to lower the credit supply down to reasonable levels." Today's remarks: "The risk of a substantial decrease in the pace of growth expanded given the recent developments in the EU and the US. In order to prevent a related intensification in the non-performing loans and any similar problems that will threat financial stability and taking into account that inflation rate is in harmony with the medium-term target, we will cut the policy rate." As you might have noted, the latter communication strategy refers both to rapid credit expansion and the risk of a recession whereas the reference is made through the objective to achieve financial stability alone. This strategy is worth considering.

This commentary was published in Radikal daily on 13.08.2011