A month ago, the CBT was talking about the possibility of an expansionary monetary policy. However, a step on the opposite direction was taken.

Tuesday morning I spoke at a news program at CNBC-e. I talked with Servet Yıldırım on the new action plan the Central Bank of Turkey (CBT) was to announce on Wednesday. It was difficult to be concrete due to contradictory statements delivered after the last four Monetary Policy Council meetings. There existed a radical difference between the results of the first three Council meetings and those of the last one. Therefore, I commented, “I, as a former central banker, do not understand what the CBT is trying to do.”

When listening on the CNBC-e the comments on the statement the CBT made yesterday I realized upon a question by Artunç Kocabalkan that my above views could be read as if I stated that the CBT has to implement a single-purpose monetary policy framework (at least by the program host and the audience). Obviously, a “single objective, single tool” framework is not an absolute must. On the contrary, I have stated frequently before, “With the lessons learned during the global crisis, the whole world started to search for a new monetary policy framework. Price stability is not considered to be the sole fundamental objective anymore. It is discussed how to devise a new monetary policy that also targets at maintaining financial stability. In this context, there is nothing wrong with the CBT’s targeting at financial stability as well as price stability.”

This is not the problem. The critical problem is that if the number of the monetary policy objectives reaches too high, you might face the risk of ending up with contradictory targets, no matter how “beautiful” they are. This contraction might force you to take U turns frequently. What is more, those U turns might cause the throwing out of the focus an objective to which you attach importance. This in turn might prove risky with respect to maintaining your credibility and shaping expectations.

An example: the decisions declared during July, August and September pointed at the risk of drops in growth (particularly due to the problems across Europe). It was maintained that expansionary monetary policy might be adopted to counteract this risk. Moreover, it was stressed that inflation might increase slightly with the impact of exchange rate movements, though temporarily. The outlook of the inflation was in line with the 2012 year-end target. Everything is okay up to this point: inflation was on track, there was no need to increase interest rates. The CBT did not complain about the exchange rate, either. There was a suitable environment to focus on growth and it was possible to reduce interest rates and reserve requirements in the case of a drop in the growth rate. As of October, however, the direction of the CBT decisions started to change: the CBT stopped talking about the risk of a drop in growth rate. Therefore, the “expansionary monetary policy might be adopted” message disappeared. Instead, the CBT conveyed the message, "Inflation rate will increase considerably in the following months. The CBT will not allow this movement to influence medium term inflation expectations and outlook." The steps to be taken to prevent such an influence were declared concretely yesterday. The minutes of yesterday’s council meeting say: "The CBT initiated monetary tightening required to control and maintain the inflation rate in line with the 2012 target." Here comes the U turn: a month ago, the CBT was talking about the possibility of an expansionary monetary policy. However, in the end a step on the opposite direction was taken.

If the risk of downturn in growth persists, then the expansionary monetary policy mentioned in previous Council decisions should still be necessary. But the CBT is unhappy with both inflation rate and the exchange rate. What to do, then? If monetary policy is tightened, growth performance will be threatened. Otherwise, inflation rate target and exchange rate will be under threat (I did not propose this causality. They all are addressed in statements by the CBT). This is what I meant by contradictory objectives. Under these circumstances you have to prioritize some of these objectives while setting back some others. This is acceptable if you will not be facing any difficultly in fulfilling the objectives that are set back. But as far as we are concerned, the risks across the Europe and the US have not disappeared making it possible to ignore the problems caused by those risks and to threw out of focus the monetary policy declared to be necessary with this regard? Neither did the inflation risk come to fore just recently that you were talking about implementing an expansionary monetary policy just a month ago.

This commentary was published in Radikal daily on 27.10.2011