Central Bank Did Not Bow Before Erdoğan

The last few days have been very intense in terms of political and economic events. On Wednesday the congress of the Justice and Development Party (AKP) nominated then-Foreign Minister Ahmet Davuoğlu (elected almost unanimously) as the new chairman of the AKP, replacing Recep Tayyip Erdoğan, who had also nominated him as prime minister. On Friday the new Cabinet, in which Ali Babacan has kept his post of deputy prime minister in charge of economic affairs, was announced by Davutoğlu.
On Wednesday, while the AKP congress was witnessing the customary diatribes of Mr. Erdoğan and those of Mr. Davutoğlu, in fact less customary, the Monetary Policy Committee (PPK) of the Turkish Central Bank was deciding not to change its interest rate policy. The PPK kept the one-week repo rate (the policy rate) at 8.25 percent, ending the period of successive cuts that has lowered the policy rate from 10 percent to its current level in three steps. I had already asserted that the last cut of 50 basis points was not justified by the economic fundamentals and a fourth cut might derail the already low performance of the Turkish economy. It might be noted that the PPK cut the upper limits of the interest rate corridor from 12 percent to 11.25, as well the interest rate on borrowing facilities provided for primary dealers from 11.5 percent to 10.75 percent, but these cuts are not able to significantly lower market interest rates, since the largest share of the liquidity supply is provided at the policy interest rate.
This decision of the central bank's management is all the more important since during the last electoral campaign then-Prime Minister Erdoğan ordered the central bank to change its tight monetary policy, declaring that “this interest rate should be cut.”

The fact that the central bank did not bow before Erdoğan is quite interesting and intriguing. This “courageous” decision should be interpreted in light of the fact that Mr. Babacan has remained in the new Cabinet. We can easily imagine that Babacan asked Davutoğlu for a free hand in regulating the Turkish economy if he wants Babacan to continue to be the boss of the Turkish economy. However, the entry of Numan Kurtulmuş into the new Cabinet as a deputy prime minister, even though he has duties other than the economy, should be noted.
If the “free hand” assumption is valid, this means that the current monetary policy will be pursued as stated by the PPK: “Loan growth continues at reasonable levels in response to the tight monetary policy stance and macro prudential measures. In line with these developments, private final domestic demand follows a modest course. The adverse impact of exchange rate developments since mid-2013 on annualized inflation is gradually tapering off. However, elevated food prices continue to delay the improvement in the inflation outlook. ... In light of these assessments the Committee decided to maintain the current stance. ... Inflation expectations, pricing behavior and other factors that affect inflation will be closely monitored and the tight monetary policy stance will be maintained ... until there is a significant improvement in the inflation outlook.”
If the “current stance” is maintained, this means that there will be no push in domestic demand. If there is no push in domestic demand, the economic growth rate will continue at its current low level. Can it be admitted that Mr. Erdoğan has given up his economic ambitions, at least until the general elections? We do not know the answer yet. If the low economic growth goes its way and the recent increase in unemployment continues, we should expect strong friction in the new Cabinet.

SEYFETTİN GÜRSEL (Cihan/Today's Zaman)