Will tight monetary policy continue?

It has become clear that the "tight monetary policy" will be re-implemented after the resignation of the Minister of Treasury and Finance, the most powerful member of the government, by not being content with the fact that the president of the Central Bank of Turkey has been changed three times in 30 months. This is evidenced by the processes that have been going on since November and have created some hope in the market.

Although the appointment of a former minister to the post of the president of the Central Bank is not in line with the political tradition in the history of the Republic of Turkey, this appointment was an example of President Erdoğan’s awareness of the process.

The appointment of Lütfi Elvan, who was the Minister of Transport and Communications in the government of former Prime Minister Ahmet Ahmet Davutoğlu, who is currently the head of one of the opposition parties, and Deputy Prime Minister in the government of Binali Yildirim, the last Prime Minister of the parliamentary system, as the Minister of Treasury and Finance was another example that the state's macroeconomic policy was entrusted to experienced people.

Prior to these changes, the main dilemma in managing the economy was the fact that President Erdoğan has long defended the thesis that "high interest rates are the source of high inflation", and its persistent application led to a constant rise in the exchange rate.

As soon as Naci Ağbal was appointed, although the gradual increase in interest rates by various tactical maneuvers at the meetings of the Monetary Policy Council of the Central Bank was welcomed by the market and created optimism, contrary to expectations, just as interest rates were not touched upon and it suddenly gave way to pessimism at a meeting a few days earlier, the fact that President Erdoğan returned to the thesis that "high interest rates are the source of high inflation" and even insisted on that not only increased suspicions but also suddenly raised the demand for the currency.

The negative impact of such political statements on the market shows that no matter how much the Central Bank raises interest rates, it will not go away easily.

The key question now is whether Mr. Erdoğan's continued insistence on the same thesis will lead to the resignation of the current president of the Central Bank. As a result of this policy pursued during the tenure of Mr. Erdoğan's son-in-law, Berat Albayrak, as the Minister of Treasury and Finance, interest rates, which have been reduced threefold from 24 points to 8.5 points in the summer of 2020, worked for the companies that built and sold the apartments and offices, emptied the state-owned banks with cheap loans, and put the economy on a more dangerous track. Therefore, no one expects those responsible for the economy to rely on state-owned banks, so there is no question of projects to be financed by those banks, and the only hope for regulating macroeconomic indicators is the Central Bank's tight monetary policy.

Although the Central Bank appears determined to do so, President Erdoğan has repeatedly opposed raising interest rates, recalling the formula that "h high interest rates are the source of high inflation".

The decline in production due to the epidemic and the paralysis of agriculture have had such a serious negative impact on macroeconomic indicators for the first time since the 2001 economic crisis.

For 28 years I watched Turkey from the inside, I can say that this is the third time I have seen such a serious price increase.

Mr. Erdoğan says they will take the necessary measures to prevent price increases but everyone knows that it will be difficult to prevent price increases in the market without supporting real industry and agriculture by leaving aside long-term guarantees for infrastructure projects and construction firms. Therefore, it is necessary to see that the only way to be followed is to keep the management of the economy as far away from political influences as possible, especially the Central Bank, and to entrust them with all the measures to be taken.

In comparison, Azerbaijan's tight monetary policy is more disciplined than Turkey's and far from the influence of political will. Both the maximum careful use of the Central Bank's foreign exchange reserves and the fight against devaluation without creating heavy pressure on foreign currencies bring with them a relative equilibrium in macroeconomic indicators. There are benefits to continuing in this way. Don't get me wrong: the experience of Elman Rustamov, who surpassed Alan Greenspan 1.5 times as the head of the Central Bank, works…

Mayis Alizade