The most popular topic these days is the emergence of diverging opinions between Prime Minister Recep Tayyip Erdoğan and President Abdullah Gül on some critical issues and the possible consequences of these disagreements on the future of the political system.
There is also another divergence, though admittedly an old one, that may raise concerns regarding the conduct of economic policy. I am talking about the difference of opinion that is becoming more and more apparent between Erdoğan and Deputy Prime Minister Ali Babacan, who is in charge of economic affairs and is the protector of the central bank's independence.
Let me start by recalling the chronology of the events that prompted concerns. Last Thursday, April 3, the Turkish Statistics Institute (TurkStat) published the monthly inflation figures, as usual. The headline was that inflation increased in March to 8.4 percent. However, what is critical is the fact that core inflation reached 9.3 percent, the highest level seen in seven years. Obviously, inflation is on an increasing track due particularly to the impact of the sizable depreciation of the Turkish lira that occurred recently. Let me also recall that the inflation target set by the government and the central bank together is 5 percent and that this target has been missed every year.
The same day, in London, Erdem Başçı, the governor of the Central Bank of Turkey, announced the main principles of the current monetary policy. He said the bank's tight monetary policy matched inflation risks, but that they would not hesitate to take additional measures if needed. The central bank's Monetary Policy Committee (PPK) had also stated after its meeting in March that it would maintain its tight monetary policy stance until there was clear improvement in the inflation outlook, adding that upside risks remained significant.
The next day, Erdoğan, while answering journalists' questions before leaving Ankara for an official trip to Azerbaijan, challenged the central bank's firm stance by summoning it to lower interest rates. "Yields are falling. In line with this, the central bank will probably convene an extraordinary PPK meeting," Erdoğan said. He added that "just like it convened extraordinarily last time to hike rates, this time it should convene and lower interest rates."
That same day, Mr. Babacan was answering the questions of Cüneyt Başaran from Habertürk TV during an exclusive interview and he was asked what he thinks about the prime minister's statement regarding interest rates. Mr. Babacan, being unable to say, “No comment,” tried to give as evasive an answer as possible, but he could not fully hide his divergence with the prime minister. Babacan said that the central bank is following the developments very closely, that the final decision on interest rates belongs to the bank and that the PPK will do what is best for the Turkish economy. However, he felt the necessity to be precise and explain that the pass-through process (the impact of the depreciation of the Turkish lira on prices) is not yet complete and that the current hike in inflation is due to increasing costs. This last statement is fully in line with those of the central bank.
What will happen if this week the PPK does not hold an extraordinary meeting in order to satisfy Mr. Erdoğan's command? And what will happen if the committee does not lower its policy rate at the routine meeting to be held within two weeks? Obviously, the disagreement regarding monetary policy, with the prime minister on one side and Mr. Babacan and the central bank on the other side, risks being transformed into an open clash that would threaten economic stability. This is exactly what I argued in my piece on March 21, “Who threatens economic stability?” Indeed, I wrote that one of the pillars of economic stability is “a well-functioning open market economy based on a sound fiscal policy and on the respect for the autonomy of key economic institutions such as the central bank.” And I added, “The prime minister's criticism of the so-called ‘interest-rate lobby,' his strange approach to fighting inflation with low interest rates, his open defiance regarding the conduct of monetary policy by the central bank must be construed as leading indicators of an imminent change in economic policies.” I was not mistaken.
Since the incumbent party is now facing low economic growth -- less than 3 percent, according to many forecasts –- while at the same time it will be challenged in two successive elections within a year, Erdoğan does not care about inflation, but he is deeply concerned by the political consequences of low growth and all the more since the incumbent party lost 6.5 percentage points in the March 30 elections compared to those of June 2011. The time of political comfort based on the economy is over.
This article has been published by Today's Zaman, 8th of March