Erroneous monetary policy continues

Erdem Başçı the governor of the central bank said yesterday it would step up its provision of liquidity by “injecting daily at least 450 million dollars per day until December 31 and that this amount can be even bigger in the last two days of the year.

While it is clear that monetary balances are upset Governor Başçı has an optimistic view of the current picture and tries to pomp this optimistic air. Başçı said extensive auction of foreign exchange will continue in January adding approximately $3 billion foreign exchange auction will be held both this month and next month.

Clearly the purpose is to register a lower rate of foreign exchange for the end of the year. 

If you were to ask what kind of benefit this will bring with it; one can say that it might not have much of an effect for the banks. But if one was to think of the rate of foreign exchange at the end of the year that will be taken as a basis for economic balances; this might serve for ratios like per capita income look better.

But this policy line is not sustainable. Because in contrast to Başçı’s expectations bigger foreign exchange exists are anticipated due to global developments but also due to the expansion of the political contention and decrease in credibility.

Başçı says there will be less volatility in the foreign exchange rates next year but he claims this will be achieved by foreign exchange auctions from the reserves. The Central Bank continues its previous position and says it has no intention increasing interest rates. But he forgets that it is not possible to prevent exits by selling from foreign exchange reserves.

Yet what the markets expected was for the Central Bank to get rid of its “interest rate obsession” and see it will take the option of increasing interest rates if necessary.

With his rhetoric yesterday, Başcı made it understood there is no need to adjust interest rates. We can say that this has further decreased the already lowered confidence in the Central Bank.

Governor Başçı look optimistic for the next year as well. He says global developments can gain stability. When he was reminded of his earlier forecast that Turkey’s currency would gain to 1.92 per dollar by the end of the year, he can say “Let’s talk again in January.”

The expectation abroad is for Turkey to return to classical monetary policies and thereby provides a more predictable vision for the markets. Yet he again underlined that they are decided in continuing the flexible policy. While there are warnings in global markets that the next 10 years will prove difficult for the emerging market and that necessary measures should be taken accordingly, our central bank insists on policies that will decrease predictability.

If the exit of foreign capital will become stronger due to global and political reasons, the existing monetary policy will make things much harder for Turkey.