The inadequacy of our monetary policy

The criticisms that came from the IMF and later from the European Union about our monetary policies started to prove right. Recently, it has become quite clear the current monetary policy of the Central Bank is fueling the Turkish Lira’s instability, in other words, the volatility of the foreign exchange rates, and it has negatively affected the fight against inflation.

The criticisms focus on the Central’s Bank’s aggregating the uncertainty in the market by creating different interest rates under the name of the interest rate corridor and resisting in not increasing the interest rates under the influence of the government. It is being emphasized that this practice is increasing the problems in the market, blocking the foresight for market players and it is equivalent to conducting a non-transparent policy.

As a matter of fact, because of the uncertainty created by the current monetary policy, recently, while differentiating from all other developing countries, the volatility of the lira has not been able to be eliminated. While it was in question that the monetary tightening was to be postponed in the United States, this situation caused the economy markets in all developing countries to turn positive again.
 
Despite that, because of the uncertainty of the policies, the Turkish Lira in this period has not been seen to be coming down.

The Central Bank’s declaration of “no increase in interest rates” has been effective in this negativity.

This both causes concern on what needs to be done but is not being done and also created the perception that the Central Bank administration will not increase interest rates during the election period because of the influence of the government; in other words, that what needs to be done will also not be done in the coming period.

For this reason, the expected decline in foreign exchange rates is not happening.

Besides, it is being said that the instability of the Turkish Lira and further deterioration in global developments would negatively affect production during the last months of the year.

Inflation report to be issued

Treasury bonds still look appealing to the investor. Unless global developments deteriorate extremely and inflation expectations increase too much for medium to long terms, the attraction of the treasury bonds is expected to continue.

However, distress signals are heard for inflation. The volatility in the value of the lira is seriously affecting inflation. For this reason, the year-end inflation target in the Medium Term Program has been increased to 6.8 percent.

The Central Bank will issue the last Inflation Report of the year on Oct. 31. In its July report, it revised the end of the 2013 target to 5.2 – 7.2 percent band, with its mid-point being 6.2 percent; in other words it had increased it.

In the Inflation Report to be released tomorrow, in parallel with the Medium Term Program, the target is expected to be increased again to 6.8 percent. The upward revisions the Central bank is continuously doing and the continuity of the volatility of the Turkish Lira further negatively affects inflation expectations.

In summary, recent developments in the U.S. and EU economies unfolded in favor of developing countries like us; however, because of the wrong implemented policies, Turkey has yet to benefit from this positive course. We hope that insistence on these policies do not cause bigger problems.