Choice for Central Bank head and first act dissipated market’s anxiety

Barçın Yinanç - barcin.yinanc@hdn.com.tr

The appointment of Murat Çetinkaya as the new governor of the Central Bank and his first decision to cut the interest rate by 0.50 percent was welcomed by the markets, according to Yavuz Canevi, who served as the head of the Turkish Central Bank from 1984 to 1986. 

“The new governor gave the message of continuity,” Canevi told the Hürriyet Daily News, adding that the independence of the Central Bank is “well-established.”

How do you evaluate the change at the helm of the Central Bank?

The fact that the change came from within the Central Bank is very positive. The new governor has at least four years of experience working in the Central Bank and this is also why the markets reacted positively.

What do you think about concerns that Murat Çetinkaya lacks a post-graduate degree in economics, a legal requirement that was changed just a few years ago? 

I don’t think this is an issue worth focusing on. I believe working four years in the Central Bank is like an internship with the same worth as a post-graduate degree. This is how we should look at it.

What do you think about the fact that he cut interest rates in his first meeting?

The markets had been wondering about whether he would make a radical introduction or continue the policy started by his predecessor Erdem Başcı. I think he took the right decision. He continued the 0.25 percent interest rate cut started by Başcı. He kept it at 0.50 percent, although some had been expecting the cut to be 1.5 percent or even 2.5 percent. He did not fall into that trap and maintained the policy started by [Başçı], called the “normalization” or the “simplification” of the interest rate corridor. With this smooth transition he gave an idea about his personal way ahead. He said, “I’m taking the road of Başcı but I am a bit more courageous.” He also gave the message that he could continue that drop in the future. This was welcomed by the markets. 

Why was it so positively received by the markets?

The psychology of the markets was disrupted. There was anxiety about who would replace Başcı, who had worked under heavy criticism. He did not surrender to that criticism. But as it became clear that he would be replaced then the probability of appointing someone who would accommodate those criticisms emerged. There were expectations that the person to replace Başcı might not implement the stable monetary policy which the markets want.

But then markets realized that there was no reason to be anxious. Çetinkaya’s message was “Don’t expect radical decisions from me.” He basically meant to say that the current policy would continue as long as there are no major developments in certain issues like inflation, the U.S. Federal Reserve’s decisions, the EU referendum in the U.K., etc.

But Başcı was also criticized for not sufficiently resisting the government’s criticism and pressure.

It has been 30 years since I left the Central Bank. Back then, the heads of the Central Bank did not speak very much. Now you can’t stop them from talking; starting from the U.S. Fed chair, the European Central Bank chair, and the Bank of England governor. Things have changed as far as central banks are concerned. The 2008 financial crisis was a turning point in that sense. The chemistry has changed. Central Banks started to be treated like supermen. They were told that they could save the world by adjusting interest rates, etc. 
Conditions have changed in Turkey too. Obviously in this global environment we are dependent on the Fed, the European Central Bank, and the Bank of England, which carry more weight on global financial markets.
Başcı’s predecessor Yılmaz Durmuş also resisted, in a very gentlemanly manner, pressure from the government. People also thought Başçı would accommodate the criticism, but his academic attributes prevented that. He tried to respond to criticism using his academic skills and thus came up with unconventional monetary policy tools. The practice of the interest rate corridor became popular during Başcı’s tenure. This was highly creative and many international bankers inquired about it. I recall how officials from the Bank of Japan came to see me to ask about it. 

Through such formulas he distracted attention and gained time. I think he ended up leaving office without getting too badly hurt, which is something to be appreciated.

Central banks need to stay independent. How do you view the question of pressure from the government?

This is natural. Politicians want to rule the country’s economy in the easiest way. But central banks alone cannot improve a country’s economy.  

The G20 became much more active after 2008, seeking solutions to the global crisis. It suggested policies in three areas: Monetary policy, fiscal policy, and structural reforms. Only the first is within the jurisdiction of the Central Bank; the other two are the responsibilities of politicians. But these two areas are very sensitive, so politicians generally avoid making moves in these areas and leave them to central banks. 

Now there are increasing calls to leave Central Banks alone. In the last April meeting, IMF head Christine Lagarde once again called on governments to review their fiscal policies and implement structural reforms without delay.

Do you think the Turkish government will take this on board? What is your projection in terms of the relations between the government and the Central Bank?

Lagarde has been saying this for a long time but most governments are dragging their feet. This is not limited to Turkey. But of course everything is relative. Some countries can afford this, but countries like ours do not have the luxury of taking it slow. I believe the government is aware of that fact. At least, the action plan that the government has declared shows this awareness. But in our case the implementation is slow. The key factor in the period ahead is to not rely solely on the Central Bank. If we keep going for the next two three years thinking that the Central Bank can solve everything I think we will be making a mistake.

What is your expectation?

I try to keep optimistic. We are organizing Forum Istanbul this week. We have been organizing these meetings for 15 years, and we keep saying that actually in each period Turkey has a window of opportunity. 
Despite all the problems we are currently facing, there are still windows of opportunities: Demographic developments, the digital world, industry 4.0. If we introduce serious policy changes and make the right investments then Turkey’s economy can get back on track and continue strongly in the 2030s. There is no reason to slip into pessimism. Turkish entrepreneurs, industrialists, and small and medium-sized enterprises are now out of their cocoon. The genie is out of the bottle and you can’t put it back in.

What do you think all this debate around the Central Bank tells us? 

I believe the independence of the Central Bank is now well-established and we now understand that there can’t be too much intervention. There is sensitivity, not only domestically but also abroad.

What do you think about the pressure put on banks in Turkey generally?

This is not an issue that has been on the agenda just now. I think there is too much pressure on banks, but let’s not forget that the banking sector in Turkey is very transparent.