The following lines are quoted from Central Bank's announcement from 2004 titled 'August Inflation, Outlook and CBRT Interest Rates: "It should be kept in mind that what Turkey needs is not high but unbalanced growth but sustainable growth in harmony with the implemented policies. To ensure this, it is necessary to implement selective measures such as supply-oriented limitations which will minimize credit expansion to reasonable levels (if detected to contradict with the goal of securing a healthier financial sector) and will also be in line with international financial sector norms."

This is quoted from the twentieth proposition under the subtitle 'current account deficit and inflation'. Back then, the hottest agenda topic was high current account deficit and ample international capital inflows. Hidden message here is: Central Bank is not content with rapid credit expansion. This is because not only of the resultant rise in domestic demand and thus the rise in imports and current account deficit. The Bank considers the problems in financial system that can be caused by rapid credit expansion as a risk. As can be noted, the emphasis is on 'rapid'. The Bank is aware that among the main goals of the program launched after the 2001 crisis one is ensuring that financial sector starts extending credits to real sector. In this context, it can be concluded that the Bank is OK with 'rapid'; the problem is caused by 'too rapid'. They believe that increasing interest rates or reducing them more slowly than usual will not prevent too rapid expansion of credits. Because the inflation rate back then is in line with the target and the Bank is afraid to face the risk that if interest rate is increased more than necessary, foreign borrowing and thus domestic credit expansion will be stimulated further. In that case, everybody turn their heads to regulatory and supervisory authority asking 'What can be done to slow down 'too rapid' expansion of credits? For instance, can a regulation on central banks' capital requirement ratio be implemented in parallel with 'international financial norms'?

This is one of the discussion points Central Bank puts to forefront in Treasury-BRSA-CBRT-SPO coordination meetings carried out regularly back then. Of course we do not need to convey here what these institutions think. Now, let me go back to the quotation at the beginning and draw you attention to the part in parenthesis. Central Bank chose to put forth the issue as clearly as possible.

Now, let us look at the third chapter of the World Economic Outlook report published by the IMF a couple of weeks ago. The title reads: 'Lessons for Monetary policy from asset price fluctuations'. The fundamental question the chapter tries to answer is: Should monetary policy be used to prevent the asset price bubbles that played a major role in the emergence of the crisis? One of the main issues addressed in this context is what central banks can do against rapid credit expansion. For instance, should they increase interest rates? Or should countries try to limit credit expansion within a reasonable interval in periods of rapid growth and vice versa through some regulations? Of course, these two can be combined.  As can be noted, considering Turkey, this situation concerns both the BRSA and the Central Bank, just as the Central Bank tried to explain in 2004. I will continue with this issue.

This commentary was published in Radikal daily on 19.10.2009