Markets take RTE to school

Governor Erdem Ba?ç? and economy tsar Ali Babacan paid a visit to President Recep Tayyip Erdo?an and his top economic advisers on March 11 to discuss the supposedly-independent Central Bank?s monetary policy.

Ba?ç??s 130-page presentation could have been titled ?Economics for Dummies.? Other than summarizing recent economic developments, the Governor also explained, using examples from many countries, that interest rates do not cause inflation, as Erdo?an claims. On the contrary, inflation and inflation expectations are the most important determinants of market interest rates.

According to Ba?ç?, the monetary policy stance, in turn, is one of the key determinants of inflation expectations. He is probably not surprised that end-year, 12-month ahead and 24-month ahead inflation expectations all rose in the Bank?s latest expectations survey, which was released on Mar. 13.

In his presentation, Ba?ç? gave Erdo?an the key to lowering market rates: Steps to enhance stability and confidence (?do not attack us anymore?), fiscal discipline and a monetary policy stance focused on price stability (?let us do our job?). Since inflation expectations and the inflation risk premium would fall as a result, market interest rates would fall gradually.

He didn?t go as far as to state that they were binding constraints, as I have been arguing, but Ba?ç? also addressed Erdo?an?s growth worries by highlighting stability and confidence as the main determinants of investment other than interest rates. He argued that structural reforms would raise investment not only by supporting savings, but also boosting stability and confidence.

Ba?ç? also implicitly showed, as I had argued in my March 13 column, that the lira?s weakness was...