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- Teacher. Dr. Selva Demiralp
- Faculty member of Koç University
Source, fake images
We all woke up by surprise on Saturday morning, March 20. Naci Ağbal, the head of the CBRT, who took over an economy on the brink of crisis and applied the right medicine, was fired within five months.
What did Ağbal do well? He saw the errors of economic management before him. As the Central Bank, it correctly determined what to do during the crisis. It prioritized price stability. He took a determined stance.
During the reform package announced on March 12, President Recep Tayyip Erdogan told President Recep Tayyip Erdogan: “They call every two price stability, we put it aside.” After his words, I was concerned that a change in monetary policy stance would be signaled.
However, I felt that these concerns might be unfounded as the Central Bank under Ağbal’s administration raised interest rates above market expectations.
However, Ağbal’s fate was not much different from that of the two Central Bank governors before him. One night he was also fired.
4 years in the US, 8 years in Europe
This removal of the central bank governors is a very bad sign for the independence of the Central Bank. Because a healthy Central Bank must be able to move away from the short-term focus of the government and be patient when necessary, to achieve the inflation target established jointly with the government.
It is precisely for this reason that the head of the Federal Reserve Fed is in office for four years. The president of the United States cannot remove the head of the Fed unless there is an emergency. At the European Central Bank, this period is eight years.
The fate of the head of the Central Bank is not in the hands of the government, it is essential that the Central Bank, which is responsible for price stability, does its job correctly. Because monetary policy is not a policy that can achieve quick results. It takes 6 to 12 months for the actions taken today to bear fruit. Especially in a country like ours that could not solve the inflation problem, this period may be longer. At this point, it is very important to show patience and give the Central Bank governor a chance to finish what he started.
Source, fake images
I was born Ağbal
In this situation, we see that the mandate of the Central Bank governors who came to power in the post-2016 period was gradually shortened. Murat Çetinkaya, who took office in April 2016, remained in office for 3.5 years, while Murat Uysal, who followed him, served less than 1.5 years. Naci Ağbal’s mandate could not last for 5 months.
The ‘no plan sign’
The rapid change of head of the Central Bank is a sign of laziness in monetary policy and lack of planning.
Beyond that, Ağbal created the impression of a powerful bureaucrat who can make the wisest decisions among the heads of the Central Bank who served during the AKP period, who does not deviate from traditional policies, who can communicate effectively and that is not driven. for government indoctrination. In fact, the policies he implemented brought the country to the brink of a financial crisis from the brink and financial indicators finally began to recover.
Source, fake images
That is why I believe that the removal of Ağbal is worse than the removal of any governor of the Central Bank. When combined with the signals that came when the economic reform package was announced on March 12, I believe that this time “putting price stability aside” really means putting price stability aside.
What happens if price stability is neglected?
You don’t need to go back far to answer this question. The policies implemented in the pre-Agbal period were precisely those that put price stability aside and wanted to lower interest rates and support loans.
There is a precondition for the interest rate to decrease; that’s reducing inflation. Before inflation falls, lowering interest rates is counterproductive. Far from stimulating the economy, it generates more vulnerability.
Reducing the monetary policy rate before inflation falls will return us to the situation of 5 months ago. What was that painting? Interest rates fell, loans increased. In this environment of unhealthy growth, self-cooling measures intervened, which we can call the immune system of the economy.
Source, TWITTER.COM/@sahapkavcioglu
Teacher. Dr. Şahap Kavcıoğlu was brought in.
‘Low interest rates have worrying consequences’
The growing demand for loans increased the pressure on the exchange rate. As inflation rose, savings owners converted their deposits into dollars when they were persistently low. Although banks were reluctant to see this distortion and lower the deposit rate in TL, the asset index that came into play at this point reduced the bank’s attractiveness to withdraw deposits.
The application of the asset ratio forced banks to lend taking risks they did not want to take. Obstinately, a program based on loan growth was pushed forward. In other words, gas was forced into the economy trying to cool down. Dollarization and the pressure on the exchange rate caused by this, on the other hand, was tried to eliminate with a greater error, that is, by selling the CBRT reserves.
As economists, we were able to predict the end and give warnings even before this experiment was done. In short, we have seen him living together in the recent past. Furthermore, we no longer have foreign exchange reserves to sell. So if at this point we were to go back again, I think it would be a fairly low interest rate policy as a result of concerns about Turkey’s economy.
What happens if interest rates go down? Since inflation will once again remain above the interest rate, savers are charged again in foreign currency. These policies, which create uncertainty and increase vulnerabilities, increase the risk premium. Capital outflows are gathering momentum. This situation increases the pressure on the exchange rate. This causes the private sector, struggling to survive the pandemic shock and whose external debt exceeds a third of GDP, to be crushed by the exchange rate shock.
The citizen in the street feels the increase of the exchange rate with increasing inflation. Inflation further impoverishes the lower income segments.
In the short term, it is sometimes possible to achieve growth at the expense of price stability. However, this type of unhealthy growth creates larger cracks in the foundation that it builds on each time. That is why I am concerned that the economy will experience a deeper contraction instead of growing this time in case of returning to politics five months ago.
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