Central Bank of Turkey (Al Jazeera)

The Turkish Central Bank, led by its new governor, Fatih Karahan, intends to adopt a strict approach to monetary policy until inflation falls to levels consistent with its goals, according to the first statements he made since assuming office.

Karahan said: “We will monitor inflation expectations and pricing behaviours. We are prepared to take action in the event of any deterioration in inflation expectations,” Reuters quoted him as saying.

The statements of the new governor of the Turkish Central Bank mean the continuation of the approach of its former president, who resigned last Friday, Hafiza Arkan, after 8 months in the position, in a move that was not surprising to the Turkish economic arena.

3 tools

Central banks have tools to combat inflation, most notably interest rates:

  • When interest is raised, deposits and savings tools in banks are attractive for funds to benefit from the returns, and thus the money supply in the markets declines, thus demand is curbed and prices decline.

  • Banks sometimes use the mandatory bank reserves tool, which is a percentage of deposited funds that are kept in central banks to hedge risks. When they are raised, they reduce the ability of banks to lend, and thus money supply and demand decline. On the contrary, when they are reduced, the opposite happens.

  • The third tool for central banks is government debt securities, such as bonds and treasury bills, which they offer in the markets in exchange for interest, and with which they attract cash liquidity in the markets to control the money supply.

Expected resignation

Economic researcher, Muhammad Abu Alyan, in a comment to Al Jazeera Net, did not consider the resignation of the former governor after a media campaign directed against her family a surprise, and he expected that its impact on the lira and monetary policy would be limited, especially since the Turkish Minister of Finance and Treasury, Muhammad Simsek, was the one who proposed appointing the new governor.

It is noteworthy that Simsek is known for his traditional economic orientations, which prefer to use monetary policy methods in the forefront of measures to combat inflation.

The former governor of the Turkish Central Bank, Hafiza Arkan, said in her tweet on the “X” platform that her decision came with the aim of sparing her family and her child, who was not yet one and a half years old, from being further affected by a campaign launched against her with the aim of damaging her reputation.

Last month, Turkish media reported that an employee of the Central Bank had filed a complaint with the Communications Center of the Presidency of the Republic, accusing Hafizah Arkan of giving her father broad powers within the bank, amounting to interference in the procedures for appointing and dismissing employees, in addition to exploiting the bank’s facilities and resorts for her family uses, which It caused a huge uproar on social media platforms.

Abu Alyan said that the new administration of the Central Bank faces great challenges in confronting high inflation and maintaining the stability of the value of the Turkish lira, in addition to seeking to enhance confidence in the local currency by encouraging savings in it, and trying to move away from excessive reliance on “dollarization.”

He pointed out that the new governor will have the task of reducing inflation at a time when he will be forced to reduce the interest rate reasonably to satisfy the policies followed by the Turkish President, in an effort to reconcile the need for effective monetary policies with the expectations of political parties.

Source: Al Jazeera + Reuters