Central Bank policies not to change in New Year

Central Bank President Erdem Başçı, who outlined yesterday the monetary policies for the next year, said in short that the policies to be implemented will not change in the year 2013.

While Başçı said the inflation rate is estimated to be near the target of 5 percent at the end of the year, interest rates in the markets after this statement went down a little. Next year a 5 percent inflation rate was targeted, Başçı said, but added the error margin was plus or minus 2 points in the inflation target. The fact that this margin is very high compared to the target rate, for me, also shows that there may be some sacrifices to a certain extent, regarding inflation next year.

The Central Bank president said their real aim was price stability but they would also continue to supervise fiscal stability. This statement shows that at the same time the Central Bank would support the growth policies implemented by the government without aggravating the inflation.

President Başçı, in this framework, reminded all that the growth rate target for 2013 was determined as 4 percent. “It will be a minimum of 4 percent.” When this time last year the growth target of 2012 was announced as 4 percent, Başçı had not made such a strong emphasis.

This, for me, is also another source of proof that next year’s growth policies will be prioritized and inflation may be sacrificed to a certain extent.

President Başçı, along with these targets, pointed out to the significance of the control of capital movements in order to maintain fiscal stability.

Başçı said that for this aim, noninterest policy tools such as arrangements in required reserves and changes in reserve option coefficients would continue.

This also shows that the monetary policies of 2012 will continue next year.

IMF thinks differently
Central Bank President Başçı, with these statements also seems to have replied to the International Monetary Fund’s (IMF) criticisms in the “Turkey: 2012 Article IV Consultation” report it issued last week.

In the IMF’s report, policies adopted by the Central Bank were criticized, also it was stated that the Central Bank should normalize the monetary policy framework and focus more decisively on achieving its inflation target, which requires a positive real policy interest rate and improved communication with the markets.

In the IMF report it was also recommended that in the medium term, higher public savings should contribute to an increase in national savings, while broad structural reforms should be geared to improving competitiveness.

The report stated that the economy had slowed, driven by weakening domestic demand and this has led to the current account deficit adjusting at a significant pace and decelerating of inflation. The report also warned, “Turkey remains vulnerable to capital flow reversal due to its large external financing needs; should this occur, it could lead to a hard landing.”

In short, the IMF recommends that structural reforms be geared to improve the economy’s sustainable development capacity, and until this is achieved tighter fiscal and monetary policies be implemented.
The Central Bank, on the other hand, despite the vulnerability factor, opts for maintaining the current course.