Let me try to be more concrete with an example. Professor Ben Bernanke of Princeton University is a staunch supporter of aggressive monetary policy-making. Targeting high inflation, the depreciation of the domestic currency and quantitative easing (QE) are the ingredients in his recipe to cure a recession. Please remember, he is known for his writings on monetary policy-making during the financial crisis of 2008-2009 and especially during the Great Depression. A zero-bound interest rate, however, is not something he thinks can make a big difference on stimulative monetary policy. Japan's stagnation in the 1990s provided the case for his evidence and led him to arrive at this conclusion.
However, Fed Chairman Bernanke has avoided the policies Professor Bernanke advocated for a long time, implementing zero-bound interest rates extensively and purchasing an extensive number of treasuries without targeting any long-term rates. This is a dramatic shift for him and has been noted by many economists, including The New York Times columnist Professor Paul Krugman, Barack Obama's chief advisor Professor Christina Romer and many others. The evident reason for this shift is the strong lobby that doesn't like inflation in the US, and the political pressure behind it. Another famous economist, Professor Laurence Ball of Johns Hopkins University, wrote a paper to look at the psychology and the reasons behind the changing views of Bernanke and concluded that “group thinking” is the primary reason, referring to the Fed's board meetings.
I am not going to enter into a discussion to explain the shifting views of Fed Chairman Bernanke. Rather, I would like to take the same debate over to the Turkish context. If you follow closely the discussions in recent months, the banking sector and its allies across the financial industry have advocated high interest rates to control credit expansion in the country. The main objective is not to make the banking sector pay the price of the booming consumer credit market.
Policy-makers in Turkey, however, are cautious in using interest rates as a weapon to control credit because doing so comes with consequences. They try to implement unconventional policies and keep the interest rate low to turn the wheels of the economy. Companies continued to invest heavily to increase their production capacities in this economic environment. Of course, the resilient banking sector in Turkey has lost some profits, but the overall economy has shown its strength despite the economic crisis in neighboring countries in Europe. The policy mechanisms have worked perfectly so far.
This does not mean there are no vulnerabilities in the economy. The current account deficit (CAD) is the primary one. And this is the main reason why the International Monetary Fund (IMF) is so confused when forecasting growth rates in Turkey. They always buy the pessimistic scenario and focus more on the deficits in the country. A recent update shows a major shift in IMF forecasts as they have now increased their growth projection from 0.4 percent to 2.3 percent for Turkey in 2012. I think this is still quite pessimistic given the flush of liquidity to the international markets.
The European Central Bank (ECB) has seen the threats and finally decided to actively intervene, flooding the European market with enormous amount of cash. The US, on the other side of the Atlantic, is in an election cycle and stimulative monetary policies are in action. Brazilian and Chinese-type emerging economies have joined the club as well. What's going to happen with all this cash flooding the system? Where are they going to find a safe place to settle? Turkey is going to be one of the countries to reap the benefits of this liquidity, and my prediction is for at least 5 percent economic growth for the year 2012 in Turkey. There is no reason to increase interest rates to make long-term real sector investors nervous and short-term portfolio investors happy with handsome profits.