Politicians should know ‘when to pull trigger’ of the finance gun
I won’t make movie or book recommendations, although the heading of the column suggests the opposite.
However, it is almost impossible not to remember the legendary words of Mario Puzo in The Godfather series when considering the conflict between several top actors in the Turkish government and the head of the Central Bank.
“Finance is a gun. Politics is knowing when to pull the trigger,” Puzo said in The Godfather.
You know the story in Turkey, but let me just remind you in a few sentences: There has been increasing pressure on the Central Bank to slash interest rates. President Recep Tayyip Erdoğan said the Bank’s latest 50-basis point rate cut was “insufficient,” saying that securing investment and employment was impossible at current rates.
Erdoğan told a news conference in January that the Bank had “still not got the message” on interest rates and he would share his views with the prime minister and the relevant ministers.
“If we want investment in Turkey, if we are creating jobs, it’s not possible with this rate. It should go down so that there will be entrepreneurship and competition,” he said.
Yesterday, even after the announcement of the latest inflation data, the Bank said that indicators pointed to inflation trending lower, adding that it would next assess the policy outlook at its scheduled meeting on Feb. 24.
However, a barrage of criticisms of the Central Bank then followed. Economy Minister Nihat Zeybekci said it should have held an interim meeting to cut rates. Erdoğan’s aide Yiğit Bulut took to Twitter to say that rate decisions should not be solely based on domestic price dynamics.
Some points may need to be clarified here: First of all, Turkey must do more than slam the monetary tightening policies of the Central Bank in order to reach the growth trend again.
As former Central Bank Governor Durmuş Yılmaz pointed out yesterday in an interview with BBC Turkish, the European economy would have grown very fast today if low rates were the main factor behind economic growth.
Another thing relates to the power of central banks. As Yılmaz also noted, the power of central banks may be exaggerated. For example, no central bank can draft a robust educational reform that would boost the economic productivity of a country by means of its short-term rate policy.
Turkey has already defined how to maintain sustainable growth in its reform packages. As many economists and businesspeople have said, what it now needs to do is to realize these reforms, going beyond promises.
It is no secret that almost all central banks feel some degree of pressure from their countries’ politicians, after a global financial crisis and amid the global economic ramifications of this crisis.
For instance, German Chancellor Angela Merkel met with European Central Bank President Mario Draghi in January ahead of a key ECB meeting, a government spokesman told Reuters. After this meeting, the ECB announced its quantitative easing scheme to print fresh money to buy state bonds.
However, we did not hear any comments from Merkel or other European politicians about Draghi and the ECB’s moves.
So, the Turkish government needs to do more than just count on the Central Bank’s possible rate cuts to maintain its economic growth trajectory.