Inflation damages Central Bank’s reputation

The October inflation rate that was disclosed the other day not only demonstrated the move away from the target, but has also damaged the Central Bank’s reputation.

The Central Bank administration, with each passing day, is losing its credibility over the markets. Within the time span of one year, the Central Bank administration first said, “We will slow down the rate of increase in bank loans,” but could not achieve it. Later, it made ambitious statements such as, “The dollar will be 1.92 by the end of the year,” “We will decrease the foreign exchange rates without increasing interest rates by the end of the year,” and “The inflation rate will near the target by the end of the year.”

While issuing such ambitious statements in such a global conjuncture created an erosion of confidence, these words at the same time contradicted economic realities; the theoretical inconvenience of pulling down foreign exchange rates without increasing interest rates was obvious and it automatically became a debating topic. 

It has to be said that with these statements the perception in the markets that “The Central Bank administration took decisions in line with what the government wanted” has risen even higher. The last time the interest rates went up, the economy management met at Prime Minister Recep Tayyip Erdoğan’s Dolmabahçe office at midnight and the next morning, the Central Bank President Erdem Başçı announced that the interest rates would go up. This has caused the reinforcement of the perception that “It is not the Central Bank, but rather it is the prime minister who takes monetary decisions.” 

We observed that after this incident, the uneasiness of foreign players especially increased and that this perception was significant in the exit that was experienced in that period. 

The October inflation rate disclosed the other day has become another factor in damaging the reputation of the Central Bank. The Central Bank administration, by saying, “the inflation target will be neared later,” therefore changed the inflation rate target and estimations three or four times within the year. 

Lastly, the past week’s Inflation Report, issued by the Central Bank within the scope of the government’s Medium Term Program, increased its end-of-year inflation estimate from 6.2 to 6.8 percent. It has been only four days since then and the October inflation rate revealed that even meeting this target has also become impossible. 

Fixation on interest rate 

The fact is that the fundamental duty of the Central Bank is to protect the value of the national currency, in other words to fight inflation, has not changed. During the global crisis, even though this target was relaxed under the name of “financial stability” by every Central Bank of every country, Central Banks prioritized mainlining price stability. 

However, in Turkey, in the recent period, it is obvious this target has been moving away. It has become apparent that a political target such as “stealthily increasing the interest rates” under the name of “interest rate corridor” has become prominent, but this practice has increased the uncertainty in the markets and weakened the fight against inflation. It was forgotten that this was a practice implemented just to gain time and it became permanent upon the government’s demand. Well, the criticisms on our monetary policy coming from international establishments such as the IMF and the EU have focused on this aspect in the last period. 

The government has an “interest rate fixation” and this has been reflected in the Central Bank. In the past, this country has often experienced the negativities created by the “fixation on interest rate.”