These steps will further reduce GDP growth in 2014. From this perspective, the decisions were untimely. But when you neglect this significant delay, the decisions were in the right direction.

The global crisis has proven once again that financial stability is essential. Before the crisis we believed that price stability would facilitate financial stability. But the crisis broke out in a period where the developed world enjoyed price stability and many developing countries attained radically low inflation rates compared to the 1980s and 1990s. Then it was understood that price stability did not guarantee financial stability.

In the pre-crisis period, micro-prudential measures were dominant: to what type of risks are balance sheets exposed? How risks might evolve in the future? What is the capital adequacy of financial institutions? Do leverage ratios tend to exceed a reasonable level? The micro-prudential framework assumed that it was enough to focus on the balance sheet problems of individual financial institutions in the context of the above and similar questions. The common belief was that a central bank pursuing the key objective of ensuring price stability could secure its primary objective and financial stability at the same time. But the global crisis taught us that systemic risks are as important as the risks posed by individual financial institutions, which brought macroprudential measures to the world’s radar. The systemic risk has two dimensions: risks that stem from the linkages among financial institutions and risks that stem from the linkages between the financial sector and the real sector.

For a couple of years now, we are used to hear that the economy management wants to prevent credit growth beyond a certain threshold. This has to do with the systemic risk that stems from the financial sector – real sector linkages: along with rapid growth, the risk appetite of economic actors surge and vice versa. Such changes in risk appetite give way to financial cycles. For instance, as risk appetite increases credit growth accelerates and vice versa. I refer to such movements when I talk about financial cycles. As you might note, the process is self-feeding in that real GDP cycles cause financial cycles and financial cycles exacerbate real sector business cycles. In other words, it further pushes up (down) GDP growth rate when it is already above (below) the potential rate. Since problems aggravate as GDP growth moves away from the potential rate, it is evident that precautions that will ease down the degree of the linkage between the financial sector and the real sector. This is the very objective of the policies aimed at the credit market.

Last year Turkey’s economy grew by 2.2 percent. 2013 GDP growth is expected to be 3.6 percent and 2014 growth expected not be any stronger, all below the potential growth rate. On the other hand, GDP growth was 9.2 percent in 2010 and 8.8 percent in 2011, substantially above the potential rate. Hence, Turkey was prone to all types of risks, financial risks in particular.

The BRSA should have taken the current steps in the late 2010 or early 2011, not today, when the economy is already underperforming its potential. These steps will further reduce GDP growth in 2014. From this perspective, the decisions were untimely. But, when you neglect this significant delay, the decisions were in the right direction as they are mainly aimed at improving the poor domestic savings rate. With this view, the decisions were timely. I will continue.

This commentary was published in Radikal daily on 28.11.2013