Back then, the CBT met several times with the Banking Regulation and Supervision Agency (BRSA) to call it for supporting monetary policy.

In this first commentary of the new year, I want to travel back to the 2004-2005 period. Along with the global crisis, the opinion that monetary policy must focus relatively more on financial stability gained ground. Currently, central banks are searching new policy mixtures and academics are conducting various studies at full speed. For example, you come up with thousands of studies conducted in 2011 when you search the keywords “financial stability-monetary policy” at Google academics.

During the 2004-2005 period, inflation rate was moving slightly below the targets while growth varied slightly above the potential. Inflation rate was in harmony with the target (Table 1). The Central Bank of Turkey (CBT) was in cognizance of the appreciation pressure on the Lira and the upwards trend in credit supply and current account deficit. These were forecasted to prevail unless external conditions changed.

The CBT was aware of the risks these trends could cause. It was purchasing large amounts of foreign exchange (FX) (amounts are given below) to strengthen its FX reserves on the one hand and working on the steps to be taken on the other. In such milieu, it did not felt the need to increase interest rate in order to slowdown the rapid increase in credit supply that also escalated current account deficit. Because, inflation was already slightly below the target. Second, increasing interest rate could have strengthen the upwards pressure on the value of the Lira by accelerating short term capital inflows. To lower the interest rate was as meaningless as it was to increase it. A lower interest rate could both increase the credit demand and credit supply in the case of which growth rate could rise and trigger the current account deficit. 

The debate was the same in essence

Back then, the CBT met several times with the Banking Regulation and Supervision Agency (BRSA) to call it for supporting monetary policy. Each of those meetings were held at the meeting hold neighboring the office of the Minister of Treasury and was attended by the Minister, Undersecretary of Treasury, CBT officials and BRSA officials. I also attended those meetings.

I have stated numerous times in a number of commentaries between October 2010 and May 2011 why the new monetary policy the CBT declared would not help slowing down the credit demand and argued that such policies could only work if the BRSA also stepped up. This proved to be the case in the end: Credit supply started to slow down only after the BRSA took action in June 2011. I will skip the details. But, believe me, the essence of debate between the two parties were exactly the same.

This commentary was published in Radikal daily on 03.01.2012