Turkey’s economy has a Central Bank problem

Turkey’s economy has a big problem: The Central Bank problem.

Not only does it avoid fighting inflation, which is its essential mission, it also does not seem to be convinced about the need for such a fight, thus only aggravating the problem.

There may be several causes of this problem. It doesn’t stem from the lack of required skills to do the job. Rather, it stems from the fact that although the people heading these institutions are equipped with the necessary information, they are not acting with any foresight.

The current administration of the Central Bank is refraining from properly fulfilling its essential task defined by the law, despite the fact that its independence is legally protected. The reason is clear: It prefers to act in line with the wishes of the political authority.

Whatever the reason, the upshot of the problem is that the Central Bank isn’t fulfilling its main task of fighting inflation. As a result, consumer prices rose to 8.81 year–on–year in December, far above the target of 5 percent at the start of the year.

Only last month, while preparations were being made for 2016, did the Central Bank revise year end inflation expectations to 7.9 percent. How can they make so many mistakes in the course of just one month?

This is not the first time that the Central Bank administration has made a big deviation from its targets. It has missed nearly all inflation targets of late and is going to have to write a letter to the government to explain why it has been unable to meet the target.

Worse, the Central Bank administration doesn’t even look close to making a correct analysis or providing an apology that will give confidence to the markets.

The Central Bank has made a presentation saying the current account deficit is falling, there is a growing trend in the exports to the European Union, the tight fiscal policy is continuing, and the interest rate corridor will narrow after normalization.

Markets have lost hope

In short, it does not look like the Central Bank is even aware of the dimension of the problem.

Actually I don’t think it is not aware. Rather, it has allowed its experience and knowledge to be hijacked by the will of the government.

At the current point, it is crystal clear that there is no trust left in the Central Bank. While refraining from saying it openly, everyone in the markets sees that the Central Bank cannot act independently and that nothing will be done with the right timing.

When you talk to people in the banking sector, they say that what the Central Bank actually looks at is core inflation, which is currently as high as 9.5 percent. They say it is a huge mistake not to take action in view of that rate.

No one is confident that a decision to increase interest rates will be taken in the Bank’s January meeting, despite these latest figures. In fact, some bankers have started to plan according to the calculation that the Bank will continue to make mistakes and we will all pay a heavy cost.

Over the last two years, the Central Bank, which should solve problems and secure stability, has itself become the problem.