Central Bank as We Know It…

Every week, I set out to write about a different topic or development in this column. Although it is possible to focus on a topic different than the trio of foreign exchange, stock markets and interest rates many times, the agenda of the economy forces me to write about one of these three things. Actually, there is nothing to write about the interest rate decision of the CBRT, but if I don’t, people ask me why I did not.

At a time when the Central Banks of major economies in the world announced rate hikes by prioritising inflation, the CBRT continues to prioritise GDP growth. It is trying a difficult formula by funding the public banks and sometimes the market with low interest rates and preventing the rise in foreign exchange rate by selling foreign currency. Growth cannot be guaranteed with continuous funding and low interest rates, and there are certain, clear conditions for ensuring the success of direct intervention in foreign currency.

As I mentioned in my previous articles, the constant depreciation of capital and savings in banks at this level of interest rate and the fact that costs increase faster than the exchange rates leads to the stocking up tendencies in production and consumption. Industrialists prefer to buy raw materials and intermediate goods instead of producing, while consumers are concerned about stocking up on products that will be more expensive in the future. As the Central Bank continues to fund the market at very low interest rates compared to inflation rates, this behaviour pattern will never change.

This is the reason why the housing and automotive prices continues to go up. Seeing that the value of the car they had bought with bank loan has increased by 50%, car owners tend to pay off the loan and sell the vehicle. Normally, financial institutions do not like early pay off of loans. However, when they get back the money they had loaned with low interest in the past, they can give out new loans with today’s high interest rate. Low interest rates, on the other hand, are the reason for the high housing prices. Those who do not find it wise to put money in deposit accounts turn to real estate.

People ask me, “What is the solution?” I say to them that this isn’t about the economy, what is being used here is only a temporary solution that will help take the edge off the markets until the elections. To me, the word solution means radical change. Structural reforms, returning the planning element to the government, restoring the reputation of economic institutions, the element of trust, and the adoption of scientific rationality… These are the tangible and effective steps that will really take the edge off the markets.

Providing incentives, cheap loans, and credit, introducing measures to help domestic producers protect themselves against foreign competition, that is imported goods, is actually nothing but “favouritism”, not development. Turkey’s trade policy has been clearly set in the 1923 Izmir Economy Congress:

  • The State is responsible for investing in infrastructure to reduce production costs.
  • Increasing physical capital without increasing the quality of human capital leads to unproductivity.

The founding philosophy of the Turkish Republic gave the State the task of making investments that will reduce the production costs, not the task of keeping the interest rates unchanged in the face of market realities. Atatürk, at 1923 Izmir Economy Congress, also urged both the public and the private sector to “train the workforce and the employers”.

We cannot ensure this training by involving young people in practices that ignore market realities. Therefore, critical decision makers should tell the public that “these decisions we make are temporary, not permanent”. Although the leaders think that it is politically necessary to present current practices as an economic model, this way of thinking sets a wrong example for tomorrow’s leaders due to its nature that reject alternatives.