Which policy does the rate which the CBT calls the “policy rate” refer to? What is the goal of that alleged policy?

There exists a huge uncertainty concerning monetary policy. Inflation rate varies around 10 percent. The Central Bank of Turkey (CBT) argues that after moving around this level for the next couple of months, inflation will decrease sharply and converge to the target by the end of 2012. Thus, the CBT expects a convergence to the 5 percent inflation target “from above.”

In this environment, the CBT keeps the “policy” rate at 5.75 percent, a remarkably negative policy rate compared to the current inflation rate at 10 percent. The “policy rate” stands between zero and slightly negative in comparison with the implicit inflation estimate of the Bank for 2012. The CBT also argues that it can, by regulating market liquidity, keep the market interest rate at a point above 5.75 percent. What is more, it only implies that the rate might change and reach to some level from “today” to “tomorrow.” It does not estimate a definite level. We do not know if the real market interest rate will be negative or slightly above zero or when exactly such movements should be expected. We do not know on the basis of which expectations economic agents will make prospective decisions, either.

Therefore, we cannot understand why the CBT expects us to regard the interest rate that the CBT calls the “policy rate” as the “policy” rate. Which policy does this rate refer to? What is the goal of that policy? Does it aim to lower inflation rate? Does it fight with current account deficit? Does it deal with exchange rate movements? Does it focus on growth rate or aim to lower the pace of credit growth? Or all of the above? What is the overall objective of the CBT? The first thing we have to avoid in 2012 concerning economic policy is repeating the performance to create all this uncertainty concerning the monetary policy objectives. As a natural extension of the first one, we have to avoid repeating the step that caused me to denote the policy rate in parenthesis.

The third issue relates to the exchange rate. Commenting frequently on the exchange rate during 2011, a chaotic year for the entire world, the CBT ultimately got itself in trouble. Once, it said, “Evaluate Lira with its value against Euro.” The other day, TV channels highlighted graphs showing that Lira was the second currency that faced the largest loss against Euro since the beginning of the year. While reports issued by the CBT were proudly presenting graphs that showed how the Lira successfully depreciated, currencies of other developing countries appreciated between late 2010 and August 2011. Then, realizing that the state of affairs in Europe would become even more chaotic in August, the CBT sold massive amounts of foreign exchange and defined a level which the exchange rate “had better not exceed.” 2012 monetary policy report, on the other hand, stated that the CBT “does not have an exchange rate target.” Which of the remarks should we count on? I am calling the CBT: Please do not talk this much about the exchange rate since you do not have the control of it, especially in this climate.

And the fiscal policy: many market economies adjust the budget figures to growth and unemployment figures below or above the ‘normal’ in order to decide the ‘stance’ of fiscal policy. For instance, if the economy grows at a rate beyond the normal, tax revenues also increase beyond the normal. Or if unemployment rate reaches above the normal, unemployment benefits grow, elevating budget expenditures. Budget balance ‘adjusted’ to such effects helps us understand whether the fiscal policy changed compared to the previous year. The current budget performance of Turkey is quite sound; however adjusted balance reveals a slight deterioration compared to 2010. We have to avoid such downturns in performance. I wish you all a healthy and happy new year.

This commentary was published in Radikal daily on 31.12.2011