Following the clear electoral victory of the AK Party in the March 30 local elections, domestic and international concerns regarding political and economic stability in Turkey expectedly subsided. Both the financial markets and agents of the real economy placed their bets on an optimistic scenario for 2014 in which export performance will increase, domestic demand and credit expansion come to a halt and the current account deficit shrink. Therefore, as opposed to overly pessimistic expectations of some staunch critics, it would not be surprising to see Turkey being once again placed among fellow emerging economies, namely the MINT countries (Mexico, Indonesia, Nigeria, and Turkey) by leading international observers rather than the dubious "fragile five" (Brazil, India, Indonesia, South Africa and Turkey) in a matter of months.
The main item on the agenda of economic actors in the post-election period is when and how the Turkish central bank will reverse the interest rate hikes it imposed under the pressure of pre-elections volatilities.
As is known, the basic interest rates in treasury bonds, which fell to historic lows of 4.5 percent on the eve of the Gezi protests last May, jumped to double digits following the uncertainties created by politically-motivated judicial operations on Dec. 17. The central bank was even criticized for perceiving domestic and international signals too late and delaying the imminent rate rises in interest, thereby triggering a higher-thannormal rate hike.
But now as the tide of political instability is truly over until the presidential elections, the investment atmosphere is profoundly transformed. Following the prime minister saying he expects to see falling interest rates soon, widespread market expectations in this regard emerged. It is likely the central bank will observe the course of inflationary pressures and the current account deficit and then make a timely decision to lower interest rates to spur growth. But beyond narrowly defined conjunctive dynamics, there is a fundamental need for the transformation of the mainstream paradigm in the Turkish central bank toward a more developmental direction.
In the global economy, the neoliberal approach to central banking was established as the main orthodoxy until the global financial crisis. This approach assumed that the main task for central banks was to control inflation and overlooked macroeconomic goals such as job creation, financial stability and economic growth. Central banks themselves also narrowly focused on formal independence and fought against inflation via indirect methods such as short-term interest rates rather than more directly via credit allocation. However, the seismic impact of the global crisis on the neoliberal paradigm and the variety of economic measures taken against it opened completely new horizons for policymakers and central bankers.
The crisis showed that targeting low inflation is necessary, but not sufficient as a macroeconomic goal itself. It also underlined the significance of financial intermediation and regulation of the financial sector to contain systemic risks, instead of micro-level supervision of financial institutions.
Moreover, it was seen that developing economies that displayed strong exit performances had central banks that used a broad array of macro-prudential tools for developmental purposes. Hence the postcrisis environment witnessed the realization of new policy experiments aimed at planning household consumption and savings, as well as discovering ways to channel national savings into more productive investments.
Whatever their policy reactions in the short term, Turkish central bankers should also have to follow the dominant trends in the developing world and widen the scope of their de facto and de jure policy responsibilities.
The new strategic vision should encompass sustainable financial stability, job creation, the stimulation of faster growth, improving productivity levels and fostering socio-economic development.