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Course correction in Ankara
In 1849, the historian Thomas Carlyle wrote, when discussing the discipline of economics:
“Not a ‘gay science,’ I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.”
The “gay science” at the time, referred to verse writing (Friedrich Nietzsche’s eponymous book would appear decades later), and Carlyle was establishing a contrast off of it, describing something that was at the opposite end on a temperamental spectrum.
Economists use the adjective with pride to this day.
For me, it’s not the discipline of economics itself, but economic policy making that is dismal. Policy making is about getting ready to for the worst under circumstances of fundamental uncertainty. Suppose you knew that a hurricane was coming, but meteorologists were not certain regarding its intensity: it could be a category 2 or a category 5 storm, the difference between serious damage and Armageddon. Which scenario do you prepare for? You get ready for the worst, of course.
Last week in this column, I wrote about the appointment of a new central bank governor with the title “track change in Ankara?”. Now, with the recent rate hike and the Monetary Policy Committee (MPC) statement, I feel confident enough to start talking about a “course correction” in Ankara. It is one thing, after all, to decide on changing track, it is another to chart a new course. That is what Ankara is now trying to do, as far as I see. Why?
Forget about the 475 basis point rate correction at the last week’s MPC for a second, and focus on the text of the announcement. Firstly, it is written in the professional style of central bankers. No more swashbuckling fight against evil that we have almost gotten used to. Nothing but price stability.
Second, it is back to straight forward central banking. The old approach had a particular subtext. “Hey, you see there is no change in the policy rate, yet the GLP rate, late liquidity window, is increased and sorry, it’s only GLP funding from now on. It’s as if the GLP rate is the policy rate but we are not saying so. It’s all about you-know-who, I have some convincing to do.” It was by definition wrecking credibility. The Central Bank was saying that they have no control over their own decisions, hence the theatrics. How nice it is to hear sound direct central banking after a lengthy interval. That is a good start for build credibility again.
These are the things I like to read, but let me get to the part I do not like that much: there is too much optimism about controlling inflationary pressure with this 475 basis point rate increase. Starting from minus credibility as well as minus reserves, it is better to be a little more pessimistic at the outset. Get ready for a category 5 and if you get category 2, so much the better. Increase the rate further if need be.
“Why are we seeing a course correction now?” you may ask. First, when asked what affected their business negatively, 58.9 percent of businesspeople say that it is the depreciation of the Turkish Lira, 26.8 percent say it was the COVID-19 induced decline in domestic demand, and 18.9 percent cite rising interest rates. Too much volatility and depreciation in the exchange rate is even worse than COVID-19 for business, and hence, voter behaviour.
Second, we are in a period of excess liquidity with negative interest rates. Yet while Greece is borrowing at negative rates, Turkey needs to pay a huge risk premium raising the rates above 6 percent. That is bad for business.
Turkey, with its large savings deficit, needs to be an integral part of US dollar markets to get out of COVID-19 induced slowdown, and into economic activity with less unemployment. The current account deficit makes Turkey an integral part of the West. The bromances or cautious flirtations with Russia and China don’t come close to that.
After all, we cannot survive bartering with China and Russia with no hard currency earnings. Turkey needs both European export markets and deep US dollar markets with no mention of tourism revenues.
To err is human, and course correction is one of the most important skills our species has to ensure its survival. In policy making, it’s not making the policy mistake that ultimately matters, but correcting course before it’s too late. While doing this, we must guard our dismal world view, and prepare for the worst. Flexibility matters. That’s what I see in Ankara nowadays, and a renewed readiness for engagement.