Central Bank and Its Main Duty

Central Bank and Its Main Duty

 

The Central Bank’s efforts to ensure that the Dollar/TRY rate does not surpass 27 has lately been one of most discussed issues on social media.

 

Years ago, I had cautioned the Central Bank chair who was constantly repeating the following article of the law: “The main duty of the CBRT is to ensure price stability”. And I was telling him that he has taken on a responsibility in an area that he was not authorized to operate. Because the Central Bank is responsible neither for the increase in agricultural product prices nor for automobile prices. Besides, trying to prevent prices from rising through rate hikes alone interest rates is a delusional act to say the least.

 

This country has repeatedly experienced that when interest rates are not left alone, our national currency gradually loses its value, and as a side effect, price stability deteriorates. And today, the Central Bank is desperately trying to prevent exchange rates from negatively affecting prices, as it fails to bring the policy rates to where they should be.

 

Letting the markets act freely so that interest rates and exchange rates can find their own value may cause anxiety over the short term, but it is worth bearing this burden to enjoy the blessings of a much calmer economic environment, where supply and demand will remain in balance. But for some reason, by pushing the exchange rates further down, we deprive ourselves of the benefits of a floating exchange rate regime. In other words, when exchange rates rise and calm down at a certain level, we damage investors’ selling and buying reflexes. And this irrational experiment will cost us almost 200 billion dollars.

 

I know that the CBRT’s hardworking staff must be offended by the things I say, but this situation reminds of business owners who insist on running their inefficient factory. They constantly lose money, but because they do not believe that there is not any other solution, they drag their employees, suppliers and customers into disaster. It is so hard to convince such people that their way is the wrong way.

 

I don’t know how long this strategy will last. But I know that it is not possible to fix a bad strategy with tactical moves. And, to be honest, I’m afraid I don’t have any positive expectations about the next moves of the central bank, especially in terms of interest rates, exchange rates and inflation.

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