Central banks are cautious

Central banks are cautious

The chief of the Federal Reserve Bank has not yet been able to give an open signal to start a new round of monetary expansion. Maybe next time during an expected September meeting. However, he is not alone. It was understood that the Central Bank of Turkey is also cautious. After reading what Central Bank Gov. Erdem Başçı recently said during a meeting, it was not difficult to notice the lender’s somewhat-hidden anxiety about the economic risks. The governor warned that it was too early to “undo our seatbelts.”

Deterioration in the global economic outlook and the emergence of new problems in the eurozone rescue plan might increase the probability of a further slowdown in the Turkish economy. After a successful soft landing, this is seen as more important for business circles than inflationary pressures. As a result, they have suggested that the bank must not hesitate in lowering interest rates in order to stimulate growth.

However, it must be remembered that if the fight against inflation is neglected because of economic and political concerns, as has happened several times in Turkey, consumer prices jumps to unexpected higher levels and growth drops to even negative figures within a short period of time. As a result, the current account balance deteriorates further, foreign exchange reserves run out, foreign debts balloon and it becomes impossible to reach external credit markets. This creates a severe foreign exchange bottleneck that halts imports of energy and basic materials, consequently leading to a cessation of industrial activity for a long time.

This also entails an increase in unemployment and a further deterioration in income distribution. All of these economic maladies contribute, of course, to the emergence of new domestic political turmoil as seen now even in many Western countries; this is not an overly pessimistic scenario. In addition to Turkey, some other emerging economies, especially in Latin America, have faced similar problems several times.

It’s not just the Turkish Central Bank and the U.S. Federal Reserve Bank – the European Central Bank, the Bank of England, the Central Bank of Japan and many others are also uneasy about the possibility of a new surge in inflation when planning to use monetary tools to prevent a probable recession.

Why are they so cautious? Worldwide experiences have taught us that inflation is the biggest economic problem to tackle and inflation-guided growth is risky for all economies. For that reason, the biggest question now is whether the world economy, the economies of both the rich and developing countries will be able to return to reasonable growth rates without entering a new inflationary era. At present, it is not easy to answer this question when European authorities are still indecisive as to how they will rescue the eurozone economy, and it is still uncertain who will be the next president of the United States.

The inflation risk must not be neglected because of social, political and other economic concerns. Otherwise, it will create more serious economic, social and political problems in the end. Turkey has a bad record on inflation, especially in terms of how it was created and how it failed to stop it. This time, it is necessary to be more cautious. Looking at the recent remarks from the main central banks chiefs, it is understood that the authorities in those institutions are aware of the problem and are ready to take action when the time comes. We are fortunate that Turkey’s Central Bank has now assumed the same position.