A tale of two central banks (and two presidents)

Governor Erdem Başçı did indeed save the best for last during his briefing on the Central Bank’s first Inflation Report of the year on Jan. 28. At the Q&A session, he said the monetary policy committee (MPC) would cut interest rates at an emergency meeting on Feb. 4 if annual inflation fell more than one percentage point in January.

It is important to note that this is not really a conditional statement. All but one of the twenty-three economists surveyed by business channel CNBC-e expect yearly inflation to decrease more than one percentage point when the official statistics are released on Feb. 3- more due to favorable base-year effects than a disinflationary trend.

This is not the first time the Bank has convened an emergency meeting. Most recently, the Bank responded to the Turkish Lira’s rout last January with an emergency hike at the end of the month. There was even an emergency cut at an “interim meeting” on Aug. 4, 2011, when the Bank reacted to eurozone woes, only to raise rates significantly at the regular meeting on Oct. 20, 2011, when it became apparent they had acted prematurely. There have also been times when the Bank announced the direction of policy rates before a meeting.


But there was always a justification, even for the Bank’s premature 2011 cut. This time, there is no economic explanation for why the MPC could not wait three weeks, until their regular meeting on Feb. 24, to cut rates. On the contrary, they took an unnecessary risk with this commitment. What if the mood towards emerging markets turned sour and pressure on the lira increased before Feb. 4?

In fact, this is exactly what happened right after Başçı’s announcement. As a result, the Bank had to release a short statement on Jan. 30, underlining that recent movements in financial markets were not consistent with their envisaged rate cut cycle. Some saw this as a way out of Başçı’s commitment, but it is not so easy: Even if the sky falls on our heads before Wednesday, the Central Bank will lose even more of its already-tarnished credibility if it reneges on its promise.

Even though it is not related to economics, there is a valid reason for a rate cut, all right. In fact, it is a six-foot, one-inch reason guarded by an army of fierce ancient warriors. President Recep Tayyip Erdoğan and his inner circle, who have been pressuring the Bank for lower rates for a while, were clearly not happy at all after the Bank’s 0.50 percentage point cut on Jan. 20.

There is a similar story going on just to the northeast of Turkey. A week after its governor ruled out a rate cut, Russia’s Central Bank surprised markets on Jan. 30 with one. As Bloomberg noted, President Vladimir Putin’s fingerprints were all over the decision.

With Russia’s oil woes and sanctions and Turkey’s dependence on global market sentiment and capital flows to emerging markets, these two countries are probably the two emerging markets that should be the most wary of rate cuts. But the central banks of both were forced to lower their policy rates because of pressures from their presidents.

So when both countries suffer the consequences of these decisions, do not blame their central banks. They were just doing what they were ordered to do, not what economic theory required them to do.