The Kapali Carsi

Don’t Make Central Banking Interesting

There wasn’t much new about the Central Bank of Turkey’s rate-setting decision last week other than the revelation that “additional monetary tightening may be implemented more frequently in the forthcoming period.”

Here’s the intro. to my latest Hurriyet Daily News column. You can read the rest at the Daily News website.

BTW, if you are wondering, the CBT is not actually violating its law because, despite Governor Basci’s clear statement, at a recent regular meeting with market economists, that it is no longer the policy rate (his exact words were something like, “I had asked my staff to remove the reference to it as the policy rate, but they have left it”), the one-week repo is still the policy rate in official CBT documents, most notably in last week’s MPC meeting one-pager. Why is that? Because officially stripping the one-week repo of its policy status and rendering it to the funding rate would have made the MPC meaningless, not to mention being a clear violation of the Article 22 mentioned in the column.

So much for my brave first attempt at investigative journalism:) But even explaining why the one-week repo is still officially the policy rate is not bad for a first attempt, eh?:) Speaking of that, I am sure you are all itching to know a bit more about the “tiny bird”. So here is some more info on her, thanks to Martin Scorsese:)…

By the way, I had totally forgotten that it was Basci’s “anniversary”: He was actually appointed to the Governor position on April 16, 2011. Rumor is he was one of the top candidates in 2006, or even the first choice, but he got vetoed by then-President Ahmet Necdet Sezer, who finally approved Durmus Yilmaz. Radikal columnist Ugur Gurses, in his column on Friday, (in Turkish), reminds his readers of the anniversary before going on to evaluate Basci’s performance during this first year in office (he also notes that the Governor decides on monetary policy himself). Let me do a similar thing.

Luckily, Basci defined his goals quite well: One of the pillars of the unorthodox policy in much of 2011, which actually started a few months before he took helm (but the birdie told me he was instrumental in devising that policy as well), was reducing the current account deficit and credit growth as well as well as depreciating the lira. And of course, as it says right at the top of the Bank’s web page, “The primary objective of the Bank shall be to achieve and maintain price stability.” As I always say, a picture is worth more than a thousand words, so first the current account deficit and the exchange rate…


…then credit growth and inflation

For the exchange rate, I’d give him 11 out of 10:); the policy was too successful!:), especially since the Eurozone woes hit the lira hard late-summer, fall…

Even the Bank accepts that required reserve hikes did not really work in curbing credit until the baking regulator came up with its own set of measures, as many economists were recommending, during the summer. That’s when credit growth visibly slows down in the graph. 5/10.

As for the current account, we are only starting too see the effects of the policies now. I’d argue that Turkey’s current account deficit is mainly structural, and the CBT doesn’t have the tools to deal with it anyway, but I’ll nevertheless give it a 6/10 for effort.

Last but not the least, inflation: I think the picture speaks for itself. 3/10.

There are also two special criteria: One is the Central Bank’s record profits in 2011. The other is Basci’s bold claim that the lira will beat the dollar this year. I am not sure if the former is a sign of success or not:), and we’ll just have to wait until year-end for the latter, even though I have argued that global developments will decide if Basci wins that “bet”.

Finally, Ugur Gurses also notes in his column that Erdem Basci had the additional advantage of being supported by the government, something which his predecessors didn’t have- at least not as much (you might argue Yilmaz was appointed by the government as well, but he was definitely not the first or second choice). To push that point further, he also had the full support of the markets.

To illustrate, when I started in Citi as their Turkey economist back in October 2006, Yilmaz had not even had half a year on the job, and my fellow bankers were routinely making fun of him as a “land registry officer”. I am still not sure what is so humiliating about being one, but the idea was that many thought he was not up to the job. Fast forward five years, and these same people had a lot of respect for him. On the contrary, markets had a huge respect for Basci when he was appointed- I don’t remember hearing (or reading) a single negative comment- everyone agreed he was the person on Earth most suited to the job. But after a year, many have doubts, although no one is calling him a land registry official yet:)

You can see this shift in sentiment in the regular Bloomberg HT surveys about the Central Bank as well. Here’s the news article about the latest one, if you speak Turkish- drop be an email if you need the actual survey (also in Turkish).

Shifting gears completely, the original column was much wider/international in scope, but I ran out of space: I have a 3200-character limit, as the columns get published in the hardcopy version of the Daily News as well. Luckily, I am not constrained in the blog:

For one thing, the move away from inflation targeting I refer to at the end of the column is a much more global/widespread phenomenon, as FT Alphaville was noting in a recent post about recent trends in central banking. BTW, one of those trends is central bank-bashing, so it is great to know that I am so hip:) Moreover, some have recently started saying that a non-independent Fed/BOE is needed (to monetize the debt to be acquired by fiscal expansions to save the economies). Martin Wolf has an excellent post about both of these arguments, and then goes on to discuss a recent DeLong – Summers paper, which basically argues that fiscal expansions are free lunches in a depressed economy.

I agree with many of the fine points made by DeLong-Summers-Wolf, as well as in the McCulley-Pozsar paper Wolf is referring to. But I would caution that these economies have always lived with a credible central bank. For a country like Turkey, monetary credibility is very hard to earn but equally easy to lose. To illustrate this point, have a look at inflation expectations:

FYI, last year’s target was 5-5.5 percent (I am too lazy to check it out), this year’s Central Bank forecast  is 6.5 percent (recently revised up to reflect the inflationary realities, probably revised up again at Thursday’s inflation report) and next year’s projection. 5.1 percent!  Don’t ask me how come the Central Bank’s projection is different from its target. So maybe we are already not an inflation-targeter, for all practical purposes, anymore…

And besides, Turkey is in a different situation than the developed world, so I am glad these independence ideas have not yet been “imported” yet…

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