beyondbrics

Bloomberg

It looks like Turkey’s central bank has finally chosen to ditch its unorthodox monetary policy – but, true to form, it has done so in an utterly unorthodox way.

After having cut interest rates at a time when the economy was growing by more than 10 per cent a year and the current account was swelling to unsustainable proportions, the bank has now heeded its critics and increased rates. All except one.

The benchmark policy rate remains unchanged, even though a whole host of interest rates have gone up, nudging the effective lending rate to commercial banks from 5.75 per cent to closer to 12 per cent. (The bank determines the exact level by deciding how much to lend at the cheaper weekly rate as opposed to the more expensive overnight rate).

The bank argues that it has increased rates in this way to maintain room for manoeuvre in the face of great uncertainties in the world economy and, in particular, the eurozone. Others interpret its move as an admission of error, albeit a highly confusing one.

In any case, it is a big shift.

Low interest rates had been the watchword of Turkey’s macro-economic management for the past year, for varying reasons.

First, the central bank argued that higher rates could increase hot money flows and hence aggravate the Turkish economy’s dependence on short term capital. Then, when justifying the 50 point cut in the policy rate in August, it argued that low interest rates were still vital, but this time it was because the eurozone’s travails had increased the risk of a downturn.

Throughout, sceptics (otherwise known as analysts off the record) argued that a decisive factor was that the powerful Turkish government also wanted rates to be kept low and growth to motor ahead.

There are various reasons why that might be the case: a general election this past June, ambitious growth targets and the likelihood of another big electoral test (a constitutional referendum) next year. And indeed the government has often declared the bank’s unorthodox approach to be vindicated.

But has it been? Consumer loans – potentially one of the biggest risks to the economy given their frequently unsecured nature – are still growing rapidly.

At almost 10 per cent of GDP the current account deficit is so big that in a bid this month to damp it down the government increased duties on cigarettes, big cars, alcohol and mobile phones. On Wednesday, the central bank said those increases were more than it expected and would translate into higher inflation, part of the reason for its tighter stance now. It added that there were clear signs of economic slowdown.

So having cut rates when the economy was booming, the bank has now increased them now it is slowing – but in a particularly untransparent way. It is hardly the usual measure of success – even for an unorthodox central bank.

Related reading:
Turkey’s monetary policy: in a bind, beyondbrics
Turkey’s fundamentals in focus, FT
Why Brazil and Turkey no longer care as much about inflation, Money Supply
Turkey: mind the gap, beyondbrics
Don’t be blind to Erdogan’s flaws, Gideon Rachman