Prof. Dr. Duran Bülbül: ‘Interest rate policy alone is not enough, an economic confidence policy is needed’

Hazal Güven - 12punto.com.tr

The Central Bank of the Republic of Turkey (TCMB) has announced its third interest rate decision of the year. Accordingly, the April policy rate was increased by 350 basis points to 46 percent. The board also raised the overnight lending rate from 46 percent to 49 percent and the overnight borrowing rate from 41 percent to 44.5 percent. 

So, what does the Central Bank’s interest rate hike mean? Faculty member Prof. Dr. Duran Bülbül evaluated the Central Bank’s decision and its potential consequences for 12punto. 

‘A POSITIVE BUT INCOMPLETE DECISION’

How do you evaluate the Central Bank’s April policy rate decision? 

“My expectation was a 500 basis point increase. If it had been increased by 500 basis points, the demand for foreign currency would have been broken, and the instability in the stock market would have stopped. A period of stability would have begun in the stock market again. However, despite everything, I find this decision positive but incomplete. 

Even before this, the Central Bank had already taken a decision that could be considered a return to a currency-protected deposit scheme. A decision was already implemented where the difference arising from currency depreciation regarding foreign exchange accounts would be covered by the Central Bank.” 

The Central Bank had taken an interim decision on March 20. When evaluated in parallel with today’s decision, what should we understand? 

“The Central Bank had previously taken an interim decision on March 20 regarding the lending rate. However, with the decision taken today, it set the lending rate at 49 percent. This means that from now on, the market interest rate at banks has been determined by the Central Bank as 49 percent. Banks were already effectively offering a market rate of 46 percent; as of today, the market rate has become 49 percent. On March 6, it had lowered it from 45 percent to 42.5 percent. The Central Bank made a faulty move with the interim decision in March.

When it raised the lending rate to 46 percent, it should have also raised the policy rate to 46 percent. If it had done so, the Central Bank’s reserves would not have eroded so much. But it did not do that. Politics, especially in the last 2 years, could not manage this process correctly during the immediate crisis—a process for which the public, wage earners, the poor, retirees, employers, and everyone living in this country paid a very serious price—and as a result, there was a 50 billion dollar erosion in Central Bank resources. This means 2 years of labor were wasted. Of course, the stock market was also very seriously affected by this faulty decision. This is another problem. Because small investors in the stock market should have been protected as well. During this period, the small investor could not be protected, and it was also a period where the resources in the hands of small investors were seriously eroded for speculative purposes.” 

‘THE MAIN PROBLEM IN THE ECONOMY IS TRUST’

So, what will be the cost of raising the policy rate by 350 basis points? 

“The figures related to the interest we put into the budget will change significantly. That is, they will increase. For this reason, the budget deficit will also increase. Inflation will also increase. The exchange rate is constantly being suppressed. Instead of suppressing exchange rates, political and economic confidence policies should be established. In other words, a confidence policy must be presented to the people. The main problem in the economy is trust. 

Even while the father of neoliberalism is abandoning neoliberal policies and, in a sense, turning toward a closed economy and protecting himself, we continue to follow an open-economy policy. This is extremely dangerous. Because there are limited Turkish goods to compete with in the world. We produce goods with lower quality, technological value, and added value. 

The policy the US is currently implementing is a mercantilist one. It is officially returning to mercantilism. Imperial states have started to clash with each other, but developing countries like ours will see the harm in this clash. They are using mutual tax and harmful competition policies. In this sense, we have no arguments to use as a tax weapon. We are defenseless in this regard.”

‘THE COUNTRY AND OUR PEOPLE LOSE IN THE PETTY SQUABBLES OF POLITICS’

What method should be followed in the economy? How can Turkey emerge from the economic squeeze that has deepened in recent years? 

“For economic stability to be achieved, foreign exchange, interest, and inflation figures are not enough on their own. What will fundamentally determine these is trust in the economy. And this trust in the economy must be provided by politics. By politics providing trust, we do not mean just the government. That is, all parties that make up the political structure in this country must be able to make joint decisions regarding economic and national interests. They can fight for this reason. Each political party can determine its own unique method of struggle. But they must act together regarding the national interests and the future of the country. Unfortunately, our country is setting a bad example in this regard. Political unity cannot be achieved regarding national interests and economic stability. 

Instead of these foreign exchange and currency policies, an economic program should be put before the country. However, as far as I can see, the country and politics have no such concern. In other words, we see that neither the government nor the opposition can produce economic policies that will provide prosperity and promise hope to society. This is a vicious cycle. Because of this instability, the inflow of hot money into our country has stopped. There is a serious outflow of hot money. As the resources of this country erode, the public becomes poorer, and people become impoverished. We must now get out of this vicious cycle and turn to policies that promise prosperity to the country. The country and our people lose in the petty squabbles of politics. I hope that both politics and the public will become aware of this.”

News Source: Hazal Güven