Central Bank remembers its independence

This time the Central Bank administration objected to Prime Minister Recep Tayyip Erdoğan’s demand for “The interest rates need to go down.” We have witnessed that the Central Bank administration, which has been in contradiction with the prime minister before, but which did not raise its voice much, this time, openly declared this demand would not be met.   

The first objection to the prime minister’s demand is said to have come from Deputy Prime Minister Ali Babacan who is reported to have said the interest rate decision belonged to the Central Bank Monetary Policy Board (PPK) and the board members knew best. Encouraged by this in a way, Central Bank Director Erdem Başçı said, “The decision to lower interest rates will be made at the PPK; it will be better to reduce the rates step by step in the future.” We have also witnessed Başçı saying, “The top limit of the interest rate corridor of 12 percent is very high; this could be lowered down to 10.” These words were interpreted by market players as, “He has moderated the conflict by saying ‘I will not lower interest rates by calling an extraordinary meeting as the prime minister wishes, but in the coming term, I can pull down the top limit a little bit without touching the prime interest rate.’”    

Now, markets are curious how the prime minister would react to the “I am independent” discourse coming from the Central Bank. It will be monitored closely how insistent the prime minister will be for an immediate reduction and whether or not the Central Bank would comply with this. In the case that it does what the prime minister tells it to do, it is apparent that the reputation of the Central Bank will be damaged and markets would react to that. For this reason, if it is obliged to reduce rates upon the insistence of the prime minister, then it can be expected that the Central Bank will do so with a cover up. 

In other words, the Central Bank remembered its independence and switched to a discourse building confidence in the markets, but we will see whether or not this determination will be maintained… 

On the other hand, it was a remarkable example when Başçı recalled the 1994 economic crisis on what would happen in the case the wrong decisions are made on interest rates. Başçı recalled that because of the insistence to hold the interest rates low, in that period, due to the hike in foreign exchange rates, the interest rates had to be extremely increased and were pulled up 400 percent.

Remarkable reminder: 1994 crisis

Because the prime minister’s insistence on low interest rates is known, it is a good reminder from time to time that in 1994 when the Tansu Çiller government insisted on lowering the interest rate despite the market, it finally caused an economic crisis. It was striking that Başçı also made this reminder because this crisis which was known as the “April 5 decisions” had its 20th anniversary last week. It is very well known by everybody that this crisis erupted because of “mismanagement.”

Başçı said there was no need for an extraordinary meeting as the prime minister wanted and lowering the interest rates would be done gradually. Başçı also said major cuts in interest rates should not be expected and it was beneficial to take careful steps. He said, “We can say it would be a safer stance to proceed after monitoring the data and the developments in the world and in Turkey.”

I hope the Central Bank does not give in from its independent stance, even if there are pressures.