Will People Be Able to Trust the Central Bank Again?

Will People Be Able to Trust the Central Bank Again?


The Federal Reserve and the ECB continued to increase rates, stressing that inflation is still a major threat. Last week, we watched the CBRT Chair speak to the press, also emphasising the same point.


I think Ms. Erkan was a bit nervous since it was her very first press conference as the head of central bank in Turkey. But she skilfully answered all questions asked and I think there was also some sympathy towards her, stemming from the fact that she is a woman. Members of the press did not tire her very much with their questions yet they asked them freely at the conference.


I immediately noticed that she had a greater command of technical issues than the former Chair Kavcıoğlu, and she also showed that she is more realistic, given the current economic conditions, by declaring that she was expecting an inflation rate above 50%. However, she did not hide that GDP growth is the central bank’s priority and that they will hike rates in a rather moderate manner, which indicates that the current CBRT Chair will try to ensure that a certain balance is maintained between the markets and President Erdogan’s wishes.


Underlining that the coming months will not be easy; her report did not contain any unrealistic goal. An unlike her predecessor’s unrealistic approach vis-à-vis interest rate, she reminded that other central banks in the world keep fighting inflation by raising interest rates. So, Erkan has at least gave some assurance to the public by saying what it is to be true.


She also expressed the central bank’s expectations about the effect of increasing tax rates on inflation, in a way that it would not leave Minister Şimşek in a difficult position. But I have to say that I do not exactly agree with her on this particular matter, and I believe that she needs a little more market information about the deterioration in price behaviour. Her theory of “raising taxes to help shrink the budget deficit and eventually better the economy” does not seem very feasible to me. How is it any different from saying, “We will run a current account surplus when the exchange rates go up”? Still, I would like to interpret this proposition as she explores the flexibility in her new role, trying to quickly adapt to new circumstances. I certainly do not want to associate this perspective of hers with the possibility that she is not quite aware of the dynamics in Turkey.


I must also add that I admired Ms. Erkan’s cool-headed stance, which she revealed fully by not answering a journalist’s question, “Do you agree with the thesis that inflation will fall if interest rates fall?”. She surely has a bright career in economy administration, as long as she preserves her ability to stay calm in difficult situations.


The bottom line is that Ms. Erkan spoke quite realistically about how they are planning to manage the economy and bring inflation under control, but the fact is everyone wants to see those words out into practice. I think the public’s confidence in the CBRT management will be restored if they can show some stability in issues such as the KKM deposit scheme, KKM, the strengthening and use of reserves, and support for exports.