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    Open the curtains already

    Fatih Özatay, PhD10 May 2012 - Okunma Sayısı: 1110


    Wouldn’t it be better if those praising an institution could open the curtain of their eyes for a minute when assessing the circumstances?

    To begin with, we have to accept that it is reasonable if inflation diverges from target in a year or two. As long as the relevant central bank explains to the actors, to whom it declared the target and asked to set wage raises, interest rates and pricing strategies accordingly, the reasons of the divergence and convinces those actors that it had taken all steps possible to prevent such an outcome.

    Turkey has been implementing an inflation targeting regime since 2002, implicitly until 2006 and explicitly since then. Inflation was significantly above the target in four of the six years since 2006. Lastly in 2011, inflation reached 10.4 percent whereas the target was 5.5 percent. The performance recorded over the last six years has been damaging the anti-inflationary efforts. Moreover, the year-end inflation in 2011 was affected largely by the monetary policy practices since the end of 2010.

    I addressed the clearest evidence to this on Tuesday. From late 2010 to the second half of 2011, the Central Bank of Turkey (CBT) implemented a policy to raise the exchange rate. With this policy, the CBT emphasized, currencies of other emerging market economies appreciated and their competitiveness was disturbed, raising Turkey’s relative competitiveness. When the inflation rates in these selected countries and Turkey are compared for the same period, however, the ugly truth comes in sight:

    Among ten countries the CBT selected for comparison, inflation rate decreased in three, increased in six and remained constant in one in 2011. The biggest hike in inflation was seen in South Africa with 2.6 points, followed by Poland and Chile with 1.5 points each. The average of the year-on-year difference was only 0.4 points. In other words, from 2010 to 2011, inflation rate in these ten countries that are exposed to the same external conditions with Turkey increased by only 0.4 points on average. In Turkey, however, it was 4 points! The new monetary policy of the CBT must be discussed on a scientific ground as much as possible, avoiding all our prejudices. As much important as it is, such efforts were generally disregarded and on some occasions prevented via columnist polemics. Here is an example: As of the end of 2010, the CBT started to raise required reserve ratios with the aim to lower the pace of credit growth. Back then I have argued in a number of commentaries that the efforts would not pay unless the Banking Regulation and Supervision Agency (BRSA) steps in. Indeed, the pace of credit growth started to slow down only after the BRSA stepped in eight months later. The BRSA measures introduced in June 2011 were really effective. The second example is about the depreciation policy on lira, initiated in a period when the international circumstances were quite uncertain. The mentioned policy was reversed soon by the second half of 2011, as Europe went into a chaos.

    If we had discussed these matters when the CBT first announced the decisions, the discussion would have raised two critical questions: first is, what policy tool apart from interest rate, the most critical monetary policy tool, the CBT use so that it can fight with credit growth as well as inflation? This is a critical question for monetary policy. If the CBT does not have the authority to use the policy tools deemed necessary, here comes the second question: what is the institutional restructuring necessary to ensure that the mentioned tools can be employed by different institutions in coordination and for a common objective?

    I have dealt with these two questions several times here. But they were not raised to the public opinion by the CBT. Neither were they discussed by columnists or academics. Obviously, this was the duty of the CBT mainly as it was who experienced the problem at the highest degree. Wouldn’t it be better if those praising an institution could open the curtain of their eyes for a minute when assessing the circumstances? Is it discreditable to talk about the flaws of a policy framework that can cause major failures? How can we remedy the flaws if we do not talk about them? If they are not remedied, will not we face severe problems harming us all?

    This commentary was published in Radikal daily on 10.05.2012