Is it possible that bureaucrats from the Ministry of Finance and the Treasury did not inform the CB of the plans?

Yesterday, inflation figures were announced. In short, consumer price inflation rose slightly while headline inflation (that excludes goods prices of which were raised recently) decreased. Given the factors I mentioned during my previous commentary, the Central Bank (CB) might lower the upper limit of the interest rate corridor more.

I want to write about monetary policy and the CB for some time starting today. One of the subjects I want to address is that the CB allowed banks to keep reserves they are obliged to keep at the CB in FX instead of lira. There are three more I want to write about; two are sort of amusing and the third on is sad, if not annoying.

I have doubts about raising the “sad” one here as it will be a harsh commentary, one that will be titled “you must be kidding me” to say the least. Please feel free to imagine harsher alternatives. Anyway, I really don’t want to write that one. So, I will talk about it briefly and implicitly: in one of the recent presentations by CB officials, there is a figure that compares per capita income of Turkey (in dollars) to that of US for the 1974-2011 period. The 1974-2002 period was tagged as “the thirty lost years.” Therefore, the 2003-2011 period is considered as the period of improvement, though not stated explicitly. Please note that the period of improvement starts with 2003 and for some reason, the year 2002 marking the start of the rapid growth, is considered a year of loss. And again for some reason, the 1974-1979 period, when per capita income in proportion to that of US was higher than it was in the entire 2003-2011 period, was not taken as a period of improvement. For the second “for some reason” I don’t accept an argument based on the exchange rate regime. If you insist, I would like to remind you of the fact that such comparisons are made on the basis of exchange rates adjusted to purchasing power parity, and ask why current exchange rates were used for the comparison. There is a lot to say and ask to the CB about this graph, but I will stop here.

And now the amusing ones: first one is the frequently raised argument that “the inflationary outlook is in harmony with the medium-term targets.” On Saturday, I will quote from the CB’s reports and announcements; hoping that they can be taken as a warning. For the second one, the lead actor is not the CB but comments and interpretations on the CB’s decisions and latest price increases. So, let’s take a look.

For some time now the CB has been lowering the average funding cost. In addition, the Monetary Policy Committee decided to lower the upper limit of the interest rate corridor by 1.5 points. In short, the CB switched to a rather “growth-friendly” monetary policy as growth is low and as it is anticipated that the inflationary outlook is in accord with the medium-term targets. Soon after, prices of two important production inputs, electricity and natural gas, were raised.

Here comes the amusing part: many interpreted and commented on these. The comments generally implied that the CB was thrown a curve and that the price raises sabotaged the CB’s decisions. As you might remember, I previously said it was almost impossible that the CB wasn’t well informed in advance of the price and tax raises. Indeed, on Tuesday the CB declared that they were notified in advance.

So, I am wondering how commentators imagine the economy management is. Do they think that the Ministry of Finance, the Treasury and the CB keep their decisions and information confidential? How can they not contact with and consult to each other? They are managing Turkey’s economy. How can you think that bureaucrats from the Ministry of Finance and the Treasury not study in advance different scenarios on tax and price raises and shared alternative scenarios with politicians, or inform the CB of these? Do you think this a game?

This commentary was published in Radikal daily on 04.10.2012