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Politics in monetary policy.

ySTANBUL (CyHAN)- Monetary policy has become part of the political sphere in Turkey. Before the last meeting of the central bank's Monetary Policy Committee (PPK) on Tuesday, President Recep Tayyip Erdoy-an harshly warned the central bank's management.

"Why are you waiting to cut interest rates while all [foreign] central banks are decreasing their interest rates? This cannot continue like this. I will call the bank managers to a meeting. One can say that they [the central bank] are independent. I, too, am independent," he said.

Then the PPK decided to cut 50 basis points from its policy rate, which decreased from 8.25 to 7.75 percent. We cannot be sure that the central bank would have cut the policy rate without Mr. Erdoy-an's warning. But what is sure is that the conduct of monetary policy has become the site of a dangerous fight between the central bank's management and the executive power, led by Mr. Erdoy-an. After the interest rate cut, Erdoy-an, Economy Minister Nihat Zeybekci and Deputy Prime Minister Numan KurtulmuE- declared that this limited cut did not satisfy them.

It is worth noting that after the PPK's decision Prime Minister Ahmet Davutoy-lu said he thought the interest rate would continue to decrease and that it is normal for him to meet with the central bank. Only Deputy Prime Minister Ali Babacan, who is in charge of economic affairs, objected to these political interventions. In an interview given from Davos, he said: "If Turkey continues to grow, it is because of our cautious behavior. Economic [policy] cannot be conducted based on emotional reactions. There can be different views, but the economy must be led according to official documents." These statements are surely indirect criticisms of Erdoy-an.

The central bank began independently carrying out monetary policy in the aftermath of a disastrous crisis in 2001. This gave confidence to economic actors, allowed the control of inflation expectations and decreased the two-digit inflation to under 10 percent. A target of 5 percent established by the government could not be reached until now, but at least inflation and the exchange rate are under control and the management policy of the central bank is internationally appreciated. Obviously, any central bank can make a bad decision. Also, any politician can criticize monetary policy. But in a democratic country with an independent central bank, I have never heard such caustic discourse, pushing the governor of the central bank to resign. If ever this occurs in Turkey, I believe the economy will be pushed into big trouble.

This, of course, cannot be the president's aim. He is so insistent on a radical interest rate cut because he is absolutely dissatisfied with the low economic growth -- around 3 percent -- and believes that decreasing interest rates will push up investments and thus economic growth. Nevertheless, he has not proposed at all how the exchange rate, inflation and market interest rates will be kept under control when the central bank's policy aligns itself with his views.

The monetary policy fights will not stop. Recently, Erdoy-an declared that the bank had still "not gotten the message" on interest rates and that he would share his views with the prime minister and relevant ministers. He will likely try to convince the prime minister to criticize the central bank's policy more strongly.

On the other hand, the central bank has clearly defended that it will be very cautious in the future. A PPK declaration made after the meeting stipulated: "Under the current monetary policy stance, the committee anticipates that inflation will decline to levels close to the target by mid-2015. Yet, a more persistent reduction in inflation necessitates a cautious approach in monetary policy. In this context, future monetary policy decisions will be conditional on the improvements in the inflation outlook. ... The tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook."

I do not think Erdoy-an will be able to convince the central bank or Mr. Babacan to decide on a radical cut in interest rates. So, there are only two possibilities: The central bank's management will either convince Mr. Erdoy-an, or resign.

SEYFETTyN GE[pounds sterling]RSEL (Cihan/Today's Zaman) CyHAN

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Publication:Cihan News Agency (CNA)
Date:Jan 24, 2015
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