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Inflation-fighting credibility of Turkey’s central bank eroded over decade prior to lira crisis: academic papers. The credibility of the Turkish central bank when it comes to fighting inflation was eroded over the course of a decade prior to last summer’s lira crisis, two academic studies have reportedly found. The papers by Turkish professors, looking at how Turkey has failed to get a grip on inflation over many years, emphasise how President Recep Tayyip Erdogan’s regular calls for lower interest rates harmed the regulator. Erdogan, a self-described “enemy of interest rates” who has defied conventional economics with demands over many years for more stimulative monetary policies, publicly opposed last year’s belated big rate hikes that helped to fight the currency crunch and get a grip on inflation that climbed to a 15-year high of more than 25%. The public pressure from Erdogan and others to loosen policy despite rising inflation led to a marked decrease in the probability that the central bank would hike rates, Reuters reported one of the papers, published in August by sisters Selva Demiralp, a former US Federal Reserve economist now at Koc University, and Seda Demiralp of Isik University, as saying. The second paper—an unpublished manuscript by economist Cem Cakmakli and Selva Demiralp of Koc that analyses currency derivative market moves before and shortly after policy changes took place— reportedly documents “a significant decline in the credibility of the central bank in the last decade. The paper is cited as saying that credibility—defined as the central bank’s ability to lower prices to its legislated 3-7% target range—took the biggest hits when it raised rates between 2005 and 2018, particularly since late 2016, suggesting investors believed the moves were too timid. This is likely “due to its weak performance in hitting the inflation target and its exposure to political pressures to cut interest rates,” the authors said. Year- over-year inflation in Turkey has remained above target roughly 10 of the last 13 years since the central bank adopted explicit inflation targeting in 2006.
The case of Turkey validates the importance of the preserving the autonomy of the central bank and central banks need to “persevere” in following their goals and not to be swayed by short-term political goals of decision-makers in government, BIS (the Bank for International Settlements) General Manager Agustin Carstens told Bloomberg on June 30.
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53 TURKEY Country Report July 2019 www.intellinews.com