In a positive turn of events for the Turkish people, yearly inflation reached the lowest it has been in 4 years: 33.5%. This might seem like a laughable accomplishment, but given the turmoil of the Turkish Lira over the past decades, it is a huge positive step. In complete opposition to this, the Norwegian Central Bank (Norgesbank) is making waves for their portfolio choices, in part because their portfolio is the largest sovereign wealth fund in the entire world. While this is impressive for such a small country, even more impressive is their monetary stability even while completely independent from larger currencies. While Norway is 119th in the world in population, it is the 13th most traded currency. These two completely different pictures actually arise from both countries pursuing the same goal. Both countries have central banks who are legally required to hold monetary stability as their highest aim. The extreme differences in how they went about this goal underlie their resulting outcomes.
Even from the beginning of Turkey’s inflation targeting regime in 2001, motivation was far more foggy than the Norwegian Central Bank. While the Turkish Central Bank regulations claimed that: “The Law explicitly defined the primary objective of the Central Bank as to achieve and maintain price stability” it also claimed that “achieving financial stability was described as a complementary objective of the Bank.” While this might not seem dangerous, the second goal became elevated beyond its complementary status. While financial stability would be greatly aided by monetary stability, pursuing financial stability alone could greatly harm monetary stability. The inclusion of “financial stability” as a goal later allowed Erdogan to take advantage of the bank and increase inflation. The Norwegian Bank much more clearly recognizes its sole goal: to promote monetary stability. In bold font on the main page of their website they proclaim: “Monetary policy shall maintain monetary stability by keeping inflation low and stable.” Trying to pursue too many goals at once makes a central bank perform poorly at all of them, and the Norgesbank has succeeded through pursuing low inflation single-mindedly.
The Norgesbank has remained remarkably consistent in its focus on pursuing monetary stability and the methods it uses to do so, but the Turkish Central Bank has raised questions about its ability to act consistently through time. The Norgesbank heavily leans on the policy rate to reduce inflation, and it rarely needs to use any other monetary tools. Because it has earned the trust of the world through repeatedly acting responsibly, it does not need to resort to any drastic measures of inflation control. The Turkish Central Bank however, faces a much more difficult situation. They are not trusted by their people or other countries, so they have often taken radical and new steps to combat inflation. This erodes trust even more, because no one knows what to expect. Even more damaging is when they neglect inflation altogether at the whim of a president. Even when facing very high inflation, the Bank refused to raise interest rates, because Erdogan wanted to spur economic growth. Constant fluctuation of aims and methods has dug the Lira into a pit that the Turkish Central Bank must slowly climb out of.
In addition to the different management techniques, the countries that these two central banks represent have very different financial situations. Turkey is in a large budget deficit that seems to be growing, and Norway has been in a budget surplus over the past few years. While Norway has a higher debt to GDP ratio, the government sovereign wealth fund is far greater than the debt. Much of Turkey’s debt is foreign currency debt, meaning that their debt to GDP ratio does not reflect the real danger of their situation. While many would disagree with debt ever being a good thing, Norway has chosen the debt that it has, and could easily rid itself of debt if that was strategically helpful. However, Turkey’s debt was not a strategic choice, but a last-ditch attempt to defend the value of the Lira. With the memories of the past 20 years to haunt them, the Turkish Central Bank is now motivated and allowed to be contractionary and get back to the stability they should have been seeking all along.
The Norgesbank and the Turkish Central Bank show how important some of the little details in inflation targeting are. While both are nominally seeking stable currency, some choices make stability far easier to attain. Earning trust through long-term single-minded focus and action is the best way to attain monetary stability, and the Turkish Central Bank is finally following in the footsteps of the Norgesbank.
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