Weekly Hurriyet column: Explaining the Central Bank
Below is my Hurriyet Daily News column for this week, which you can also read at the Daily News website. No cheesy titles this time around, and no wordplays, either.
I will have a proper addendum later on, as I have many more things to say. But as I mentioned in that post, yesterday’s guest column is a nice supplement / complement to the column.
As for Central Bank communication, I think the Bank is well aware of the problem. I have had several CB employees admit they are not doing a great job in communication. But I just heard this morning that Governor Basci will be speaking to a number of domestic TV stations to explain himself (or rather the Bank’s policies) this week.
I have always argued that the Bank should be more active in communication. For one thing, I feel their policy that only the Governor can speak in the Bank’s name must change. Both the Governor and the top brass should write op-eds, give interviews to newspapers, make speeches, etc. While it may be a while until all these are implemented, talking more to TVs is a good start.
Anyway, I just learned that Basci will be speaking to business channel CNBC-e in a few minutes, at 09.00 GMT to be exact. As your friendly neighborhood economist, I will be live -blogging even though I am in London. Long live the internet! BTW, if you are a Central Bank top brass reading this, no think to thank. Since I don’t think foreign TVs are on the agenda this week, I thought I would do my civic duty to relay your communication efforts to the world; at least to the people who follow my blog…
Anyway, on to the column:
I spent my first full day in London reading almost everything written on the Central Bank of Turkey’s interim Monetary Policy Committee meeting last Thursday.
There seems to be quite a bit of confusion in markets about the Bank’s decisions. While some deemed them as a return to orthodoxy, others are calling it a new chapter in the Bank’s unorthodox approach. According to some, the Bank is trying to fend off hot money; others claim it is trying to attract such short-term flows.
Since I have not heard back from the Bank on my recent job application, I decided to explain its recent actions to strengthen my case. What seems to have created the biggest confusion is the surprise interest rate cut. The Bank decreased the (policy) one-week repo rate from 6.25 to 5.75 percent because it believes, like my blog’s host Nouriel Roubini, that the risk of a double-dip recession in developed economies has risen.
The Bank has been saying for a while now that, should global economic problems intensify and lead to a contraction in domestic economic activity, all policy instruments could be eased. But many economists and columnists have been rightfully questioning what changed since the Inflation Report and meeting with bank economists at the end of July, when the Bank signaled no rate cuts for the remainder of the year.
Global economic conditions did indeed worsen during the intervening four working days, with U.S. growth and global Purchasing Managers Indices, or PMIs, turning out to be very weak. These, coupled with the contractionary effects of the U.S. debt reduction plan and increasing European debt woes, raised double-dip worries.
Therefore, the rate cut makes sense, not for me, but for someone who thinks there are no inflationary pressures and the current account deficit will improve going forward. In fact, Central Bank Gov. Erdem Başçı emphasized these points when he “verbally intervened” after the lira continued weakening on Friday. So unlike many, I do not see a complete U-turn from the previous announcements.
However, there is no evidence of spillovers to Turkey yet. In fact, I find it telling that the only economy with a decent July PMI is the one cutting rates. You could argue that the Bank is acting proactively, but with real interest rates already near zero, I don’t think the rate cut could have a meaningful impact on demand, although it is likely to disrupt the country’s fundamentals further down the road.
Since cutting the policy rate is lira-negative, the Bank also increased its borrowing rate, which would decrease volatility of the overnight and attract short-term capital flows. The other measures, resuming foreign currency selling auctions and decreasing reserve requirements on foreign currency liabilities further, are also lira-supportive.
But if you are the only country that has cut rates among the four dozen or so emerging markets on investors’ radars, half of which have actually raised rates, you had better explain yourself clearly. Unfortunately, communication has never been the Bank’s forte.
Maybe, I should retract my job application. After all, the point may be coming when no one will be able to spin-doctor the Bank out of this mess.
* Emre Deliveli is a freelance consultant and contributor to Roubini Global Economics. Follow his blog, the Kapalı Çarşı, at www.economonitor.com/emredeliveli/.
2 Responses to “Weekly Hurriyet column: Explaining the Central Bank”
economopoulos • August 8th, 2011 at 2:56 pm
I don't want to sound conspiratorial, but could it be just a coincidence that the CBRT so hastily rushed to cut the interest rate in an emergency meeting one day before the S&P downgraded the US debt?
edeliveli • August 8th, 2011 at 3:28 pm
You know what, that crossed my mind as well. After all, information is a two-way street:)…Sent by BlackBerry Internet Service from Turkcell
