The CBT can fulfill the authorities granted by the relevant law more easily if it helps economic actors shape healthy inflation and interest rate expectations.

The Central Bank of Turkey (CBT) no longer has a single objective. For instance, the CBT Governor Erdem Başçı said the other day that the Bank will intervene if the real value of the lira (that is the real exchange rate) reaches a certain level. The CBT has stressed several times that they aimed the credit growth rate at a level around 15 percent. Moreover, the CBT introduced a series of measures between the late 2010 and August 2011 in order to lower the current account deficit, explicitly stating this objective. From time to time, the Bank declared that it may change its policy stance due to concerns related to growth performance. Meanwhile, inflation targeting was preserved as a policy tool.

Accumulating risks

There are both critical and supportive accounts for the multi-target or multi-objective monetary policy framework. This is just natural. After all, any given economic policy intrinsically has positive and detrimental effects. Some may think benefits outweigh harms while some others think harms override benefits. In addition, there is a third group which has faith in each and every action the Central Bank or the administration of the economy in general take. But I have no intention to discuss with them as it is impossible to discuss against faith!

I am of the opinion that the tools developed recently in particular cause future risks to accumulate. I think I haven’t addressed this issue thoroughly at this column. I will definitely write about the future risks soon. Yet, this third piece of the series “The pursuit of transparency” does not aim to criticize the “multi-objective” policy framework of the CBT. My concern is, given the multi-objective policy in effect, what must be done to ensure that the policy framework proves beneficial. From this perspective, I believe that steps to enhance transparency will shore up the current policy framework.

Before switching from the implicit inflation targeting regime to the explicit inflation targeting regime, the CBT had gone through a long period of preparation. This process lasted throughout 2005. A part of the preliminary work was about the communication regime under the explicit inflation targeting regime. The content of the inflation reports issued quarterly was discussed and studied at length as a tool to this end. The inflation report addresses economic developments in Turkey and in the world in the context of the “current and possible future impacts on inflation.” It dies not discuss recent developments separately out of a general framework.

The report sets forth the inflation estimates of the CBT in the light of the existing and possible developments and discusses under which circumstances the estimations will hold. Taking departure from this point, the report tries to give insights about the future interest rate policy and finally addresses potential risks.

The Inflation Report

What is the purpose here? First, the primary objective of the CBT, as the relevant law stipulates, is to achieve and maintain price stability. Second, in the context of this objective, the CBT together with the government identifies and announces the year-end inflation target annually. Third, the Bank aims to make the monetary policy in effect comprehensible to people so that the uncertainties clouding their forecasts and plans about their future will be limited.

The CBT can fulfill the authorities granted by the relevant law more easily if it helps economic actors shape healthy inflation and interest rate expectations. Let’s set aside the legal part of the issue for a moment. Even this simple framework reveals that the content of the Inflation Reports, the major communication tool of the CBT, has to change, right?

This commentary was published in Radikal daily on 24.11.2012