Turkey's central bank gets international praise
The central bank's unorthodox but successful policies have won its governor international accolades.
By Alakbar Raufoglu for SES Türkiye -- 24/01/13
When Turkey's central bank started implementing unorthodox policies in late 2010 based on daily liquidity management, an adjustable interest rate corridor, controlling reserve requirement ratios and a low policy rate, many economists were skeptical.
Turkey Central Bank Governor Erdem Basci was named Central Bank Governor of the Year by a London-based magazine that covers international finance. [AFP]
"Nobody believed the central bank could reach its targets without any road accident," said Tufan Comert, a senior economist at Garanti Securities.
Today, by many accounts, the economy is doing very well. It has managed to escape the worst effects of the global financial crisis and policy makers have successfully engineered a "soft landing" of what was one of the fastest growing -- overheating -- economies in the world.
Fundamentals are also improving. The currency is stable, inflation is at 6 percent from 11 percent last April, and the current account deficit has trailed back to a high but acceptable 6.5 percent from 10 percent in late 2011.
Writing in The Banker, a London-based monthly magazine, Central Bank Governor Erdem Basci argued last year for flexible and multi-pronged policies to deal with global uncertainties.
"The challenge of achieving two goals -- namely price stability and financial stability -- by using only one policy tool -- short-term interest rates -- is an impossible one," he wrote, noting that alternative policy instruments and macroprudential tools were needed to supplement the short-term rate instrument.
Basci's unorthodox policies led The Banker to choose him as the Central Bank Governor of the Year for his success in "steering Turkey through the economic turbulence of 2012."
Speaking to SES Türkiye, Recai Berber, a ruling AKP member of the Parliamentary Planning and Budget Committee, said the award was the result of the Central Bank's innovative policy formulation of the past two years.
"Last month, our committee reviewed Mr. Basci's role and policy during his first term in the office. We saw that the central bank has been developing and implementing serious and effective monetary policies that put our country in the first place in Europe and the rest of the world," he said.
Erhan Aslanoglu, a professor of economics at the Marmara University in Istanbul, agrees that even though the central bank’s interest rate corridor and reserve option coefficient mechanisms created some uncertainty, "it helped the slowdown in aggregate demand."
The previous rise in aggregate demand was driven by excess liquidity and low interest rates. Through the unconventional policy of raising bank reserve requirement ratios the central bank was able to reduce liquidity in the market while maintaining a policy of low interest rates. The low interest rate policy was developed to discourage short-term, speculative capital flows in the face of loose monetary policies in developed economies.
In the meantime, Aslanoglu said the policy could be tested this year.
"I think it will be successful for a mild recovery," he told SES Türkiye. "If the Turkish economy will move to high growth rates like 7 to 8 percent one day in the future, the current policy will need modifications to eliminate some uncertainties it contains."
For Burak Saltoglu, an economics professor at Bogazici University and co-founder of Riskturk, a risk management company, the central bank has been "innovative and flexible to avoid the negative impacts of the global turbulence over the last two years" by controlling the negative impact of hot money without losing control over inflation.
"To summarise, without losing the control over inflation the Central Bank has done a good job managing financial stability with innovative rules tailored for the Turkish economy. So tools [such as the interest rate corridor and reserve option coefficient] smoothed the exchange volatility, and hence growth volatility has also been minimised," Saltoglu said.
"With standard tools we would pay a much higher interest rate cost and have very high exchange rate volatility," he said, adding that when conditions permit, the central bank can switch back to conventional policies.
Looking ahead, Comert said 2013 could be another tough year for Turkey as the central bank's multi-target, multi-tool policies will be tested.
"We expect the central bank to keep a close eye on the credit growth rate in 2013, as it is the key for current account balance," he said.
On the other hand, Comert added, the central bank clearly maintains a balance between growth and inflation.
"It seems that 6 to 7 percent inflation with a 4 to 5 percent growth rate is the new norm for Turkey," he said.