ISTANBUL (CIHAN)- Last week we witnessed a furious debate over monetary policy (see my piece "The fault line under the central bank,"
A profound disagreement has clearly appeared between Prime Minister Recep Tayyip Erdogan, supported by his inner circle, on the one side and the central bank, supported by Deputy Prime Minister
Deputy Prime Minister Babacan and Finance Minister Simsek tried to calm Prime Minister Erdogan down through various statements, claiming that the central bank's independence constitutes a critical element of macroeconomic stability. Turkish Central Bank Governor
Nonetheless, the prime minister does not seem to be convinced about the monetary policy based on the arguments of Governor BasÇi in his presentation. Indeed, he declared a day later that he does not believe the current policy is positive and desires new steps to be taken very soon with respect to interest rates.
On the other hand, Governor BasÇi's defense in his presentation can be summarized into five points: 1) If a strong interest rate increase is not implemented (by the end of January), expectations of the exchange rate and inflation will worsen, pushing the long-term interest rate up even more; 2) Do not worry, inflation will start to decline and we will proceed with interest rate cuts accordingly; 3) Real interest rates are about 2 percent -- Mr. Erdogan had previously claimed that they are at 4-5 percent -- and they are no higher than the real rates prevailing in emerging markets; 4) Gross domestic product (GDP) growth is currently close to 4 percent and, moreover, is balanced; and 5) The current account deficit (CAD) is decreasing thanks to balanced growth.
Needless to say I fully agree with Mr. BasÇi. The economy is going through a necessary adjustment period. Reducing both inflation and the CAD require strict control over domestic demand as well as a stable exchange rate. However, Mr. Erdogan is basically concerned about economic growth. He is not happy with a rate of under 4 percent even though it is balanced, which is, in fact, the main official goal of the economic governance headed by Deputy Prime Minister Babacan. Mr. Erdogan is right as well since GDP growth of under 4 percent would not be sufficient to reduce unemployment and increase public spending. He needs a booming economy in electoral periods, all the more since Justice and
What will the next episode look like with the profound disagreement over monetary policy? I think the prime minister will wait for a few months in order to observe the basic economic figures. The first critical revelation will be the publication of the GDP figures for the first quarter on
SEYFETTIN GÜRSEL (Cihan/Today's Zaman) CIHAN
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