Prof. Dr. Hakan Kara: 'The CBRT wants to buy time until the election'

Prof. Dr. Hakan Kara, former Chief Economist of the Central Bank of the Republic of Turkey (CBRT), stated during his presentation titled ‘Macroeconomic Policy Approaches and Results’ at the Economic Research Forum (EAF), established in partnership with Koç University and TÜSİAD, that the economic administration has returned to generally accepted policies. He said, “Even though the CBRT interest rates have increased, deposit and loan interest rates are not following suit. But there is tightening. There is too much emphasis on liquidity. Interest rates are high, but demand is not. They cannot raise commercial loan interest rates, and for this reason, they are trying to keep deposit interest rates low. Liquidity comes into play there, and there is no competition in that regard. The breakdown in transmission is caused by complex regulations. The Central Bank wants to buy time until the election.”

"AS LONG AS KKM MELTS AWAY..."

Stating that the risk of a balance of payments crisis after the election has decreased, Kara said, “Those concerns are over. However, there is still something important in the big picture that needs to be fixed. The public's foreign exchange position has deteriorated significantly. As long as the Protected FX Deposit (KKM) melts away, it is difficult for the Central Bank to improve its net position. Looking at the total, there has been an improvement of 70 billion dollars in the public foreign exchange position since the election. Looking at CDS, it has converged with countries similar to ours. If it continues like this, credit rating upgrades may come. Our credit ratings are currently at 2001 levels. We do not deserve this,” he expressed.

"ACTIVELY MANAGING FOREIGN EXCHANGE"

On the other hand, pointing out that the CBRT is implementing a very strict exchange rate regime, Kara said, “It is actively managing foreign exchange. There is a strictly controlled exchange rate regime. It allows it to go up during moments of tightness. The risk of experiencing a speculative attack is low.”

Regarding what needs to be done, Hakan Kara said, “In the coming period, there are two things: we need to increase monetary tightening and maintain the coordination between monetary and fiscal policy. So far, this coordination has not been very good. We lost the first half of 2024. If financial conditions tighten, then two things will happen in the over-controlled exchange rate regime. There will be a simplification process.”

"THERE WILL BE A SLOWDOWN IN THE SECOND HALF OF THE YEAR"

Explaining his growth forecasts, Hakan Kara said, “There will be a slowdown in the second half of the year. Annual growth will also fall to 2 percent. I am more optimistic than the market regarding current account transactions. In the coming period, the current account deficit will continue to improve rapidly. We expect gold imports to fall to 12 billion dollars. I think the current account deficit will be below 20 billion dollars this year. The Central Bank will be able to manage this exchange rate more easily. If there is an improvement in capital flows, foreign exchange liquidity will also be good,” he said.

Stating that domestic demand will continue to slow down in this period, Kara said, “There has been a deterioration on the inflation side for 15 years. There is undeniable tightening, but more needs to be done. Once the service sector starts to increase, it is like a transatlantic liner; it is difficult to change its direction. Breaking this will not be easy either,” he said.

Regarding inflation expectations, Kara emphasized that the expectation of 36 percent for the end of this year and 14 percent for 2025 are very ambitious rates, saying, “But one should not get hung up on the numbers. The CBRT's credibility on this issue is very weak. Ultimately, we have not been able to convince people. It is time for action, not communication. The CBRT has had forecasts that have remained below the actuals for 7 years.”

"FISCAL POLICY MUST MAKE SAVINGS"

Emphasizing that coordination in fiscal policy needs to be strengthened, Kara said, “The monetary policy side will do what is necessary, but fiscal policy must make savings. Otherwise, it cannot be convincing. First, the public must make its own savings, and by changing the tax system and spreading it to the base, it must create a fair tax system. If these are seen, we will be happy. I am not very optimistic about the official forecasts for long-term inflation,” he expressed.

News Source: 12punto