World Bank’s Turkey envoy: 'Central Bank interest rate decision is premature'

BARÇIN YİNANÇ

World Bank Turkey Director Martin Raiser says ‘we don’t see see a reduction in core inflation data yet,’ therefore the Central Bank’s interest rate cut decision was early.

The Central Bank’s latest interest rate reduction is “premature” according to Martin Raiser, the Word Bank’s Turkey director, who told the Hürriyet Daily News that the current conditions would usually dictate a tight monetary policy, not reduced interest rates.

On June 24, the Central Bank lowered its benchmark interest rate for the second straight month with a 75 basis points cut, in a bid to boost economic growth amid political pressure for a looser monetary policy.

“We believe it was premature because we don’t see in the data yet the reduction in core inflation. We do see inflation expectations in the long run lower than inflation is today. But we would have preferred a more cautious policy stance at this particular juncture,” Raiser told the Daily News on June 26.

“We believe that in the current environment Turkey is growing reasonably well compared to other markets in the region, it is probably operating relatively close to full economic potential. Inflation is above the target range that the Central Bank set for itself. These are not conditions in which you would typically reduce interest rates; these are conditions in which typically you would keep monetary policy tight until you see headline inflation coming down,” he added.

Raiser said there was no need to “overemphasize” the drop, as the move is gradual and the markets have not reacted too negatively, though he also added that the current political discussions about Central Bank policies were “not helpful.”

The rate reduction came shortly after Numan Kurtulmuş, the deputy chairman the ruling Justice and Development Party (AKP), suggested a change in Turkey’s laws to rein in the influence of the Central Bank.

“I [prefer to] put emphasis on the statements of those government officials who have publicly reinforced the government’s commitment to the independence of the Central Bank. The officials that have spoken in that direction are the ones responsible for economic bloc and I believe they have sent the right message on the independence of the Central Bank and generally the rule of law and the independence of monetary regulatory institutions,” said Raiser.

Monetary policies being discussed in political arena is not unique to Turkey, said Raiser, but markets need to know that central banks are ultimately independent.

“There is no reason why these things should not be debated. But what the markets needs to know in the final event is that the Central Bank has a mandate to guarantee price stability and sets interest rates in view of this mandate, not in view of other political considerations. Unfortunately, the discussion in Turkey has sometimes raised questions over the extent to which that is the case,” he said, adding that the Bank has a mandate to fight inflation and its policies should only be judged on whether it achieves that mandate.

“It would probably be better if the discussion [on Central Bank decisions] was turned down a little bit and the Bank was left to do its job. Ultimately we will see if the inflation starts to come down, as it has predicted, and then it should be given credit for it if it remains above the target range for a longer period of time,” Raiser said.

When asked how the Central Bank had fared so far Raiser said inflation still had to be brought down. “Inflation is above the target range so I don’t think they should be entirely happy. At the same time this has been a volatile environment and a difficult one to navigate. But in our view inflation is still too high and should be brought down,” he said.

The World Bank readjusted its 2014 growth forecast for Turkey from 2.4 in its global economic prospect report to 3.5 in its country note for Turkey, which was recently published, nearly two weeks after the first report.

Raiser stated that Turkey’s first quarter GDP numbers were not reflected in the global economic prospect report, as they had still yet to be released at the beginning of June.

“It looked like we changed our mind in the course of 12 days, but the global economic prospect forecast was the old forecast and didn’t take into account the first quarter. What we released earlier this week is the forecast that takes into account the first quarter numbers,” he said, adding that these first quarter numbers were “surprisingly good.” 

“We felt we would be unrealistically conservative if we stayed with the lower number. We did not expect growth to maintain such momentum and we were encouraged by the strong performance of net exports. You had in the first quarter an economy that both grew quickly and started to rebalance; it is a lovely combination. It is not clear to want extent that can be sustained during the rest of the year but we welcomed it nevertheless and readjusted our forecast accordingly,” Raiser also said.