I guess most of you are aware that the wave of optimism of the late 2009 that the world economy will recover and growth rates will reach to reasonable levels is not felt much recently. Important economists started to write warning articles more frequently. A new fiscal stimulus package is recommended against the persistent unemployment rate in the USA. There are credible ideas that the belt-tightening measures in the European Union, particularly the decisions made in the Germany and the arguments of the President of European Central Bank, are too early.

Those who do not assess the data as "proponents" commonly agree that the pace of growth in Turkey starts to slow down. Data on the first quarter will probably signal an acceleration of the pace; but this will not be permanent. The main reason for this is the mentioned slowdown in the pace of growth.

The gradual rising of the risk that the European Union will not be able to grow has the potential to cause major problems for Turkey's exports. On top of this, the developments in Europe's financial markets since the spring affect the confidence environment in Turkey adversely. In brief, growth rate in the second half of the year will be lower than the first quarter. But more importantly, the year 2011 is a candidate to be a big challenge considering economic growth.

Both the domestic and external conditions are quite different than those over the 2002-2007 period. It is also apparent that the conditions over the near future will be even more different. In such a milieu, monetary and exchange rate policy should be reviewed. Any single economic policy cannot and should not be the only applicable and right policy that works under any conditions. The evolution of the inflation targeting regime in Turkey is an evidence for this: In the milieu where inflation rate is high and targeted to be reduced rapidly, the Central Bank declared that they will focus solely on inflation. The Bank never said they consider the difference between current and potential level of production when making interest rate decisions. The inflation was reduced to single-digit levels but then the global crisis hit and unemployment rate tended to increase along with economic contraction. Central Bank put the emphasis on the production level being below the potential level in statements about interest rate decisions or other in other important reports.

Now it is time for the third stage in inflation targeting regime. We need a framework that also considers the competitiveness of Turkey. I talked about this necessity before the global crisis hit. How we need this even more. What this implies is as follows: before, exchange rate affected the interest rate decisions of Turkey as much as it affected the inflation rate and production level through exports. So, there was an indirect effect. At the third stage, in addition to this indirect effect, real value of the exchange rate should also have a direct effect on interest rate decisions.

This is not sufficient alone. Turkey has to design measures creating disincentive for short term capital inflows. Before the global crisis such measures were not considered 'sympathetic'. However under the current conditions such measures will at least be not be seen as strange. Recently some countries introduced measures in this direction. It would be useful to analyze the decisions and implementation results there.

In the period ahead the old discourses shall be foregone. This is nothing but natural given the changing circumstances.  All we need is courage!

This commentary was published in Radikal daily on 08.07.2010