We are faced with a complicated situation. Evidently, the critical challenge is that there are several monetary policy targets.

Given the Central Bank’s (CB) discourse and messages in the last couple of years, members will probably have a hard time in the next Monetary Policy Committee meeting. Taking the statements of the CB into account, there are several reasons both to cut and to not cut or even to increase interest rates.

Reasons supporting a possible interest rate cut: first, in April lira appreciated in real terms and reached 121.1, exceeding the CB’s declared intervention threshold. True, the CB cut the rates in the April meeting anticipating this trend, but the real appreciation of lira will most probably continue in May. Second, there is no indicator which could convince us that recovery started in the first quarter of 2013 and is to become stronger yet. We still receive mixed signals. On the one hand, credit growth is high, interest rates have been decreasing, and foreign capital inflows have been increasing, all of which indicate that growth rate must have increased. On the other hand, neither capacity utilization ratio and the real sector confidence index, nor the non-gold export and non-gold and non-energy import figures support any recovery as such.

Industrial output figure for March was released yesterday, but it does not give a concrete message concerning the start of recovery. In the first three months of the year, calendar adjusted industrial output increased by 2.5 percent year-on-year. This is lower than the 2012 average at 2.9 percent but considerably higher than the last quarter of 2012 at 0.9 percent, which implies that recovery has begun. In March, however, annual output growth was 1.4 percent, lower than February and the first quarter average. The same movement was observed also with non-gold exports, as you might remember. If unadjusted figures instead of calendar adjusted figures are examined, the evidence that the recovery has not yet started becomes stronger. These, together with the grounds already voiced by the CB require another interest rate cut.

Chief among the factors against the cut is the radically low savings rate. Deposit and bond rates below inflation rate either discourage or shift savings to gold and housing markets. The mirror reflection of low savings rate is high current account deficit (if investment rates remain unchanged), which evidently is not desired.

On the other hand, the rise in credit growth rates continues. Annualized rate of growth in thirteen-week average credit volume adjusted to exchange rate movements, that is, the indicator the CB uses, show that annual credit growth rate in the first four months of 2013 was 22.2 percent, significantly above the professed threshold at 15 percent. What is more, credit growth rate was 24 percent in April and was even higher for the last two weeks. It is obvious that interest rate cuts might push up credit demand. Read together, the global liquidity abundance and the CB’s ROM policy which encourages FX borrowings imply that banks are able to increase FX borrowings and further the credit supply growth.

We are faced with a complicated situation. Evidently, the critical challenge is that there are several monetary policy targets. What is more, the monetary authority does not have the tools to achieve some of these. Yet, this clearly is an attractive case for people who like economic policy design and policy fine-tuning.

This commentary was published in Radikal daily on 09.05.2013