Since my Hurriyet Daily News column needs to be limited to 550-600 words, I find that I sometimes do not end up saying all I wanted to say. I would like to add a few things to my latest column:
First, what the CBT did with its latest rate cut is indeed very similar to what the Fed has been doing for quite some time: Minimize the tail risks. Indeed, tough times do call for tough measures, and today we might be needing Helicopter Bens rather than Bagehot's conservative central banker. But the CBT, unlike the Fed, is faced with two tail risks: While the risk of all the Fed easing finding its way to inflation is very small for now (see my recent Hurriyet Daily news column for more on this), we cannot say the same for Turkey.
Second, while the CBT has not explicitly said so, I believe they have been tempted by a chart similar to the one above, which shows currency movements since around the time of the CBT's surprise rate cut in November. The lira has been doing quite well against the dollar since then, but so are many currencies. In fact, the lira's strong performance partly reflects recouping from the large deleveraging September-November, when lira was one of the worst performers. What if another wave of deleveraging hits? Do I need to mention Turkey's own woes due to the large external financing gap?
Finally, it might be fair to ask me what I would have done. While I dare not have the wisdom of my country's central bankers, I would have gone for a less preemptive move, to make sure that I do not end up with another policy reversal, as in 2006 and early this year. That would really damage the credibility of the Bank. I would have preferred the Brazilian way, where the central bank is going through the easing path more slow-footed, but definitely not weaker.
You might encounter that the Bank does not have the time to wait, as 2009 could be a negative growth year, which I discuss in a recent Hurriyet column. But as I have argued before (last in this Monday's column), the monetary transmission mechanism is not likely to be effective as long as there is an external financing gap and the economy is liquidity-constrained. The rate cuts will surely help, but we need more innovative measures, such as the recently in-vogue credit guarantees. Rather than discuss the high interest rate, low exchange rate conundrum, is anyone thinking of doing anything on the surging costs in letters of credit? I am just asking because cutting rates will not help there...
First, what the CBT did with its latest rate cut is indeed very similar to what the Fed has been doing for quite some time: Minimize the tail risks. Indeed, tough times do call for tough measures, and today we might be needing Helicopter Bens rather than Bagehot's conservative central banker. But the CBT, unlike the Fed, is faced with two tail risks: While the risk of all the Fed easing finding its way to inflation is very small for now (see my recent Hurriyet Daily news column for more on this), we cannot say the same for Turkey.
Second, while the CBT has not explicitly said so, I believe they have been tempted by a chart similar to the one above, which shows currency movements since around the time of the CBT's surprise rate cut in November. The lira has been doing quite well against the dollar since then, but so are many currencies. In fact, the lira's strong performance partly reflects recouping from the large deleveraging September-November, when lira was one of the worst performers. What if another wave of deleveraging hits? Do I need to mention Turkey's own woes due to the large external financing gap?Finally, it might be fair to ask me what I would have done. While I dare not have the wisdom of my country's central bankers, I would have gone for a less preemptive move, to make sure that I do not end up with another policy reversal, as in 2006 and early this year. That would really damage the credibility of the Bank. I would have preferred the Brazilian way, where the central bank is going through the easing path more slow-footed, but definitely not weaker.
You might encounter that the Bank does not have the time to wait, as 2009 could be a negative growth year, which I discuss in a recent Hurriyet column. But as I have argued before (last in this Monday's column), the monetary transmission mechanism is not likely to be effective as long as there is an external financing gap and the economy is liquidity-constrained. The rate cuts will surely help, but we need more innovative measures, such as the recently in-vogue credit guarantees. Rather than discuss the high interest rate, low exchange rate conundrum, is anyone thinking of doing anything on the surging costs in letters of credit? I am just asking because cutting rates will not help there...
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