The Central Bank’s interest decision - ERDAL TANAS KARAGÖL

The Central Bank’s interest decision

The Central Bank Monetary Policy Committee announced its interest decision yesterday. The Central Bank increased the Late Liquidity Window Interest Rate, which it has been using recently, from 12.75 percent to 13.50 percent.

The motivation behind this decision of the Central Bank is to decrease the activity in the exchange rate and prevent high pricing caused by its increase. We can say that with this decision, the Central Bank is prioritizing to reduce the effect of especially the activity in the exchange rates on prices in the recent terms and hence, price stability.

The reason behind the increase in the interest rate is clearly stated in the Monetary Policy Committee Resolution Text as:

“Inflation and the expected high levels of inflation continue to pose a risk on pricing behaviors. The rise in import prices has increased the said risks. In this context, the Committee has decided on a measured monetary tightening to support price stability.”

As can be understood from this statement, the exchange rate-price transitivity is taken seriously.

Interest-exchange rate growth balance

The Central Bank resorted to increasing interest rates when there was an increase particularly in the exchange rates in past terms as well. Because interest was considered the solution to the increase in the exchange rate. This policy tool might seem to be the one with the least cost for the Central Bank, but it leads to great costs for the economy and especially growth.

The decision to hike interests which was taken to prevent the increase in the exchange rate might reduce the activity in the exchange rate in the short term, but in the long term, it stands as a great obstacle that will have a negative impact on economic growth, that may lead to increased loan interests and prevent investments.

Therefore, this sensitive balance must be taken into consideration in interest decisions. Accordingly, in addition to price stability, macroeconomic goals such as unemployment and economic growth must also be among the Central Bank’s objectives.

This situation becomes increasingly important for developing countries like ours that want to make the switch from the league of middle-income economies to high-income economies.

The aims of Central Banks around the world

There is a strong emphasis on money stability in the Central Bank Monetary Policy Committee Decisions, but unfortunately, matters concerning economic growth and employment are not included. There is benefit in recalling the fundamental aims of central banks around the world.

For example, a review of G20 countries’ Central Banks’ monetary policies shows that they have other macroeconomic objectives concerning the country’s economy in addition to price stability.

For example, while the Central Bank of India aims for price policy, it has also included economic growth on its agenda. The Central Bank of South Africa in its turn aims to ensure price stability “for a balanced and sustainable growth.”

The Central Bank of Canada aims to support Canada’s economic and financial welfare. The priority of the Central Bank of Mexico is to ensure the stability of the purchasing power of the local currency, while the Central Bank of Russia aims to increase the welfare of Russian citizens.

The Central Bank of Brazil attaches importance to forming strong and effective financial markets, while the Central Bank of Argentina's fundamental goal in its inflation target is to realize economic development by ensuring social equality.

As can be seen, in addition to targeting inflation, world Central Banks also determine various macroeconomic aims concerning the country’s economy and take part in the country’s economic agendas.

In this context, in addition to the Central Bank ensuring price stability, it is important for it to have other goals that prioritize the growth of the country’s economy and unemployment.

Seeing these goals both in monetary policy decisions and in decision texts that direct the markets will increase confidence in the Central Bank and its credibility.

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