Monetary policy or ‘eye to finger’?

Governor of the Central Bank Şahap Kavcioglu He went to the press conference to present the Inflation Report, as he always does at the end of July. He spoke at length about the success of exports and said that while there was talk of recession all over the world, Turkey was left out. I think the most striking was this; He said, “We will continue to take necessary steps to ensure that all interest rates converge to the prime rate,” given the fact that market interest rates, which recently approached 30%, are higher than the prime rate. CBRT interest. In other words, it went to the “finger of my blind eye.”

While the IMF’s July forecasts predict very low growth of around 1%, not a recession with downward updates in a significant part of Turkey’s export markets, it is clear that this slowdown will slow exports. In this case, it is clear that we will face high inflation and a stagnant economy. While the effect of stagnation on domestic demand is delayed, as purchasing power erodes from devastating inflation, we will see if we can stay out of it.

Regarding inflation, which is its main business, the excuse “What goes wrong in the world goes wrong with us, too. Inflation is rising in every country in the world, we are aware of our difficulties at the point of high inflation other problems , we are aware of our difficulties”, he repeated. It is impossible for Kavcıoğlu not to know that he created this ‘distress’ in a fragile economy with his decision to cut interest rates under political directive.

The press conference appeared to be part of the quest for ‘Palace’ approval rather than public responsibility. Why not? If the head of an institution that is required by law to guarantee price stability, on the contrary, lit the gasoline that fueled devastating inflation, much less price stability. It is clear that the place where a bureaucrat would take refuge and seek approval would be the political will that would put him there and implement his directives.

It is very clear how empty were the statements made at the meeting in the Inflation Report and what was said about the issues. There were many contradictory and inconsistent emphases in what Kavcıoğlu said. While he said that reserves continued to increase, the real situation is that reserves have decreased by 13 billion dollars from the beginning of the year.

Although it is well seen in the graph presented in the Inflation Report, when asked that the inflation trajectory forecast by the Central Bank is 80% lower at the end of the year, and that the band should reach 90%, he verbally refused. When asked insistently, he did not respond.

Kavcıoğlu said: “The currency that has lost the least value in the last month, when we take the last 10 days off, is the Turkish Lira.” He seemed to have forgotten.

Also included in the above chart, the “control horizon” describes the future period in which the effect will be seen, using the base rate of the monetary policy instrument today. A power that makes the interest rate insignificant and a central bank that becomes its office cannot have a concept of ‘horizon of control’. If you don’t tap into the interest, you don’t have a ‘control horizon’. With interest at 14%, market rates signaled to approach that, it means the business will spiral even further out of control.

Is it possible for a government that destroys the reputation of the Central Bank and the money it prints to give confidence? Not. Is it possible for institutions and administrations that implement policies that make it attractive to hold the Turkish lira as a liability rather than an asset to be held, to control inflation? Not.

TL breakout is encouraged

The exchange rate increase in the last month was approximately 7.5%. Better stick with it. The most important factor that has made holding foreign currency more attractive in the recent period is that the interest paid by banks to foreign currency accounts has increased. Interest paid to foreign currency accounts at banks has increased to 4-6 percent. Whether state banks are leading this upward trend is another matter.

Making foreign currency retention attractive through lower TL interest rates and, in addition, the public’s foreign exchange guarantee for the foreign currency-indexed deposit window revealed an incomprehensible picture.

Despite the exchange blockade of companies and banks in the last 1 month and the intervention in foreign exchange selling them through the back door, the exchange rate increased by 7.5 percent. Why not, interest charged on bank deposits is 1.6% per month, interest for late credit card debt is 1.8% per month, late payment interest applied by the government to tax receivables is 2.5%.

In fact, Kavcıoğlu was saying about the fact that market rates are higher than the CBRT interest rate: “We will continue to take necessary steps to ensure that all interest rates converge to the base rate.”

Those who implement this policy only because ‘the highest officials said so’ know this; Creating LT liabilities, delaying and deferring existing TL liabilities, purchasing foreign currency indexed products using TL loans have become very attractive.

They are also aware that they are fueling demand for foreign currency as they extend the lockdown.

The increase in foreign currency accounts in the two weeks before and after the party alone is 4 billion dollars. In addition, a US$4 billion foreign currency loan was closed. So, in two weeks, 8 billion dollars of foreign exchange demand was created on these two items alone.

The calculation was such that “summer would come, tourists would flow in, foreign currency would become plentiful and the exchange rate would decrease”. We are in the ‘peak season’ of tourism at the end of July, but there is a roaring demand for foreign currency. It is worth mentioning that the exchange rate in the Grand Bazaar, the heart of the effective exchange rate, is 10-15 cents higher than the interbank market.

Bankers, on the other hand, say the Central Bank instructs them to “bring the foreign currency held by reporters into the country.”

According to BRSA data, banks have 24 billion dollars in foreign correspondents. In contrast, it has $84 billion in debt to domestic and foreign banks alone, not including foreign currency accounts and other liabilities. An official in the country is suggesting that I keep these foreign currencies with me.

While this is a continuation of the “buy foreign currency” suggestion made to companies earlier, it creates a lot of unease. Because the citizen “is it our turn?” feeds your anxiety.

The bureaucrats, who were managing these turbulent policies in Ankara and now chasing events and making things worse, must have realized that they cannot manage the economy by “pressing the button.” Every step they take makes things even more impasse and beyond their control.

As we enter the month of August, the only agenda is the 6-month maturity of companies that hold a significant amount in their “Currency Protected Deposit” (KKM) accounts. With this concern, Ankara has already renewed its tax exemption. Still, without any additional ‘carrots’, some of the companies are likely to convert their foreign currency-indexed TL accounts into their foreign currency KKM accounts at maturity. Because the issue is not just income and tax gain. They also have priorities in relation to liquidity and external debt payments.

It is considered ‘dark humor’ that the administration of the economy, which tries to postpone the problems with vehicles with bigger whirlpools that will arise in the future, created its own whirlpool and didn’t like it. When asked whether Turkey’s credit risk premium (CDS) reached 900 last week, Kavcıoğlu said: “Turkey, which is incomparably better than the economic and political problems experienced by many countries, is facing an unfair CDS.”

Did you say law?

Two points stood out at the Kavcıoğlu press conference. The first was Bloomberg’s Onur Ant question; Noting that the president “continues persistently in growth and current account surplus”, the inflation target is more than 15 times, but he is proud of the employment with the New Model of Economy, without recession and with an increase in the share of exports, ” Does it bother you, in principle, to just look at inflation? Your hands are tied. On the matter, Kavcıoğlu said: “I think that when the Central Bank law is read, there is nothing to tie our hands or feet. The subsentence of defining inflation, employment and growth, and the task of producing policies in coordination with government policies were also given to us. It has been set the ‘s task that we can accomplish by keeping inflation under control,” he said.

This is not the task assigned to the Central Bank in its law (Article 4). It’s not called “keeping inflation under control.” As a first condition, the task of price stability is given. 80% inflation is not a ‘kept in check’ level, the task of price stability is being distorted.

In the law, after saying that “the bank’s main objective is to guarantee price stability”, it opens a conditional area by saying “The bank supports the government’s growth and employment policies, as long as they do not conflict with the objective of guarantee price stability”.

This is the article that President Kavcıoğlu recommends everyone to read. However, there is a clear substance there that holds your hands. It’s price stability.

“Price stability,” he says, refers to sustained inflation at 2-3 percent. There is a government that clearly breaks the law. The fact that a central bank, which has turned price stability into a fire, brags about exports and employment, is tantamount to making millions of poor families ‘snake’.

Second, when asked about moving the Central Bank to Istanbul, Kavcıoğlu explained that they are trying to move the Central Bank to Istanbul from the end of September as part of the program.

Was he really talking about an institution whose law says “The bank’s headquarters are in Ankara”?

Who is Uğur Gürses?

Uğur Gürses graduated from Ankara University, Faculty of Political Science (Property), Department of Economics in 1985.

Gürses, who started his career at the Central Bank of the Republic of Turkey in 1986; He has worked in the areas of foreign exchange policy, management of foreign exchange reserves and open market operations.

He worked as a manager in private commercial banks between 1994-2000. Before the 2001 crisis, he left the bank and started working as an economics commentator on TV channels.

He continued his daily articles on economics and finance, which he started in the Yeni Yüzyıl newspaper in 1999, and later in the Yeni Binyıl newspaper. He wrote for the newspaper Radikal between 2001-2014 and for the newspaper Hürriyet between 2014-2018.

Uğur Gürses, who commented on economic developments on his personal blog ( after 2018, started writing on T24 in December 2021.

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