Can you be a hawk and a dove at the same time? If you are a central bank overseeing a booming economy, soaring domestic lending, a gaping current account deficit, and a volatile currency popular with the carry trade crowd, you probably need to be. That explains why the normally cautious Turkish central bank has become a font of radicalism. Its continuing experiment in a two-pronged monetary policy – loosening and tightening at the same time, using different measures – could have valuable lessons for other booming emerging markets.
For the second month in succession, the central bank took investors by surprise on Thursday, cutting interest rates while raising banks’ reserve requirements. The aim is to weaken the lira to reduce the carry trade, curb an explosion in domestic credit (so the economy won’t overheat), and rein in the deficit, which is around 6 per cent of gross domestic product. The policy is working: the lira is at a six-month low against the US dollar and speculative inflows have slowed.
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