Erdoğan’s way – in monetary policy

The market had barely finished buzzing around the Turkish Central Bank Gov. Erdem Başçı’s statement Jan. 6 on how 2012 would be “the year the Turkish Lira will beat the dollar” when even more dramatic words came from Prime Minister Recep Tayyip Erdoğan himself.

Speaking Jan. 10, Erdoğan claimed the current account deficit was “now in order” but pointed toward the “new threat” of the “interest rate lobby.” I will include long quotes because the statement, while underlining once again Erdoğan is the one who calls the shots in Turkey, also reveals a “merchant perspective” of the world.
“We cannot have the interest rate lobby operate as such,” the prime minister was quoted as saying. “The more vicious the interest rate lobby, the more diminished the purchasing power of our citizens – who are the consumers – will be. Also, entrepreneurs will be forced to cut down on investment, because as seen in loans, interest rates are high. The policy rate is around 5.8 percent. However, market interest rates are hovering around 13-14 percent.”

Emphasizing the need to close this gap, Erdoğan repeated his belief that as market interest rates rise, so will inflation. “I do not take other [interest rates] seriously,” he said. “But as much as we lower the market rate, inflation will be lower... Unfortunately, as the market rate rose to around 14 percent recently, inflation also rose to 10.45 percent.”

I will not indulge myself with the claim on the interest rate-inflation correlation, or what caused the market rates to rise, or who put the brakes on loan growth, or the reasons for double-digit inflation. A cursory glance at economic developments of 2011 would suffice to set the record straight on these. In regards to the current account deficit, as of November, the 12-month rolling gap fell to 10.2 percent of GDP from 10.3 percent of GDP, according to an Erste Securities report. How the decline can point at the end of the problem is also beyond me.

What is more interesting is the outcome of such tough rhetoric: Political opposition to the government has, for some time, been under serious risk of “Ergenekonization” by being labeled pro-coup and anti-democracy. Now, it seems, criticizing economic and monetary policy risks being labeled “interest rate lobbying” by being an enemy of growth and prosperity.

This tactic could work in the short term; notice many market players have been talking “anonymously” to the press for some time now. A “death to the lobby” themed story run by Sabah newspaper yesterday included an admission six Turkish banks refused to comment, for example.

However, in the long run, such rhetoric can only mean policymakers are painting themselves into a corner regarding choices. They won’t be able to raise the policy rate in the future even if they want to do so.

Adopting to change and mastering pragmatism was what saved Erdoğan and his Justice and Development Party many times in the past. Today, in the face of approaching regional and global storm clouds, those key traits look increasingly vulnerable.