Encouraging different growth rates for different credit types might trigger investment expenditures. This would be the best option concerning the current account balance.

I want to dig deeper into the question I asked the last time: Credit growth rate or interest rate? Last time I argued that given the current circumstances, credit movements had a more critical influence on growth. Also, I said that I will later elaborate on the question “was it the conventional interest rate policy alone that yielded results?”

Discussing these, I will particularly focus on this perspective: if the monetary policy had any impact on the economic slowdown in 2012 whatsoever, there is strong evidence that the influence was driven mainly by interest rate hikes. But I don’t want to appear as if I am talking paradoxically, arguing credit movements are importance on the one hand and stating that interest rate policy worked on the other. Indeed, there is no paradox here, as I will discuss below. Instead, there is one issue which becomes more and more interesting as you dig into.

15 percent credit growth

I am not sure if it was announced in advance, but we later learned that that the desired upper limit for the credit growth was 15 percent for 2011 as well as for 2012. This figure is suggested also for 2013. Since 2011, however, short-term interest rates that are critical for growth performance, including the deposit and credit rates which are directly influenced by the Central Bank (CB) differed remarkably. In other words, the CB on the one hand sought to keep credit growth unchanged but on the other hand allowed short-term interest rates to float at different levels. Let me give a couple of figures on the interbank rates: 6.4 percent on average from January to October 2011, 10.4 percent until the end of 2011, 9.7 percent in the second quarter of 2012 and 5 percent at the present whereas, credit growth rate was tried to be kept below 15 percent throughout this period.

The common rhetoric today is that, “the (beyond-the-desired if you ask me) economic slowdown was foreseen and accordingly short-term interest rates were lowered starting in July.” Then, growth rate in 2013, which is expected to fall below 3 percent, is aimed to be improved. The Medium Term Program targets at 4 percent. So, the goal is to increase growth by more than a percentage point and keep the credit growth unchanged. This relies on the assumption that with credit growth rate constant, a decrease in interest rate will improve growth rate. This assumption might hold provided that a drop in interest rate will be reflected onto deposit rates. Real deposit interest rates generally are low, which might boost consumption among consumers that do not need a loan to buy durables. In that case, the aim would be to foster consumption at a certain degree without pushing up consumer indebtedness (credit debt).

Dangerous waters

If this is correct, then there are three points to pay attention to:

1. Interest rate should be lowered sharply in order to achieve the goal. This condition is partially met. The above figures reveal that interest rates decreased by 4.7 percentage points over the last couple of months. Moreover, we might expect the CB to further lower rates in the months ahead. This might imply that we are drifting towards dangerous waters concerning inflation performance. That is to say, there is a limit to this policy.

2. Concerning current account deficit, growth driven by consumption is the worst possible option. Not all types of consumption escalates current account deficit, though. The least-desired would be the rise in consumption of those who do not need loans, that is, the target of the mentioned policy.

3. Encouraging different growth rates for different credit types might trigger investment expenditures. This would be the best option concerning the current account balance. It would be useful to elaborate on this option.

This commentary was published in Radikal daily on 15.12.2012