ISTANBUL, June 12 (Reuters) - The damage to the Turkish central bank’s inflation-fighting reputation that culminated in last year’s lira crisis has been years in the making, with its credibility having been progressively eroded over a full decade, two academic studies have found.
The papers by Turkish professors, including one yet to be published that analyses currency derivative market moves before and shortly after policy changes took place, offer a rare academic critique of the country’s failure to rein in inflation.
They highlight the role played by President Tayyip Erdogan’s repeated calls for lower interest rates, which the research suggests have harmed the bank.
Last year as the Turkish lira at its worst shed half its value against the dollar and inflation hit a 15-year high above 25%. Even though the central bank hiked rates to 24% in September, many investors and economists saw the tightening as too little too late as the economy tipped into recession.
On Wednesday, the bank held rates steady again but set the stage for a cut by signalling more confidence that inflation, which remains above 18%, was headed lower.
Erdogan, a self-described “enemy of interest rates” who has urged more stimulative monetary policies for years, publicly opposed last year’s rate hikes.
The public pressure from him and others to ease policy in the face of rising inflation in recent years has had a marked decrease in the probability that the central bank would hike rates, found one of the papers, published in August by sisters Selva Demiralp, a former U.S. Federal Reserve economist now at Koc University, and Seda Demiralp of Isik University.
The second paper, an unpublished manuscript by economist Cem Cakmakli and Selva Demiralp of Koc, documents “a significant decline in the credibility of the central bank in the last decade.”
They find that credibility - defined as the central bank’s ability to lower prices to its legislated 3-7% target range - took the biggest hits when it raised rates between 2005 and 2018, particularly since late 2016, suggesting investors believed the moves were too timid.
This is likely “due to its weak performance in hitting the inflation target and its exposure to political pressures to cut interest rates,” the authors said.
Year-over-year inflation has remained above target roughly 10 of the last 13 years since the central bank adopted explicit inflation targeting in 2006.
The second paper analysed the reaction of longer-term dollar-lira swap rates to policy moves and assigned a level of credibility to each.
Concerns over central bank independence from Ankara in part set off last year’s lira crisis, and they have loomed behind a new bout of selling in recent months. While foreign investors and analysts regularly criticise monetary policy decisions, Turkish economists rarely speak out.
Turkey’s central bank did not immediately comment on the academic findings.
The renewed selloff in the lira since late March - at a time of easing inflation - has prompted the central bank to turn to an array of unorthodox measures to support the currency.
“Central bank credibility is low and independence is questionable (and it) has been persistently behind the curve,” said Marcelo Assalin, head of emerging market debt at Netherlands-based NNE Investment Partners. “History informs us that any tightening response is likely to be temporary.”
Additional reporting by Karin Strohecker and Marc Jones in London; editing by John Stonestreet