Trust in a society is the cornerstone on which stability, progress and prosperity are built. This is especially true in all economies where trust plays an important role in ensuring the effective functioning of financial institutions, policymaking process and the economy.
In recent years, the issue of trust has become increasingly intertwined with debates in the economic sphere, particularly surrounding central bank independence and credibility, reflecting the complex interplay between economic governance and public trust.
The Importance of Trust
Trust is among the key determinants of social cohesion and economic development. Trust is an integral part of social capital and the foundation on which communities thrive and individuals flourish. In an economy, trust creates the ability to foster cooperation, reduce transaction costs and improve social cohesion, as well as build bonds that strengthen solidarity and resilience in society. Trust facilitates the sharing of information and resources, enabling mutual learning and innovation, facilitating access to supports, opportunities and resources, and supporting the formation and maintenance of social networks.
In trusting environments, economic activity flourishes, democratic processes run more smoothly and individuals experience higher levels of happiness and fulfillment. Nurturing trust, building and sustaining social capital is therefore essential to contribute to the vitality and prosperity of societies around the world.
For Turkey, as for all countries, trust permeates various aspects of daily life, from interpersonal relationships to commercial transactions and public institutional activities. At its core, trust has the ability to reduce uncertainty and foster cooperation by promoting predictability, thereby creating an environment conducive to investment, innovation and growth.
When individuals and firms trust the integrity and predictability of economic actors and institutions, they are more likely to engage in productive activities, allocate resources efficiently and contribute to prosperity.
Central Bank Independence and Reputation
The central bank is at the heart of the confidence in the economy in a country. The central bank plays a critical role in formulating and implementing monetary policy, ensuring price stability and ensuring the efficiency of the financial system. Central bank independence, characterized by autonomy from political interference, is seen as a necessity to ensure the functioning of monetary policy and the stability of the national currency.
The main determinants of central bank independence include the legal framework, institutional arrangements and political factors. The legal framework provides the legal basis for central bank independence, including the degree of autonomy granted to the central bank in formulating and implementing monetary policy.
Institutional arrangements, such as the central bank’s governance structure and decision-making processes, also play an important role in determining its independence. Factors such as the tenure and stability of central bank governors, appointment and dismissal procedures, and the composition of decision-making bodies affect central bank independence. In addition, political factors are important determinants, including the level of political support for central bank independence and the degree of government interference in monetary policy decisions.
In recent years, concerns about the erosion of central bank independence in Turkey have led to central bank decisions and actions being on the political agenda more than ever before. Undoubtedly, this agenda undermines the confidence of economic agents and the market, while increasing volatility in financial markets and strengthening the tendency of the Turkish lira to depreciate.
Since the credibility of the central bank in the market depends on its ability to communicate effectively with market participants and the public, utilizing transparent communication channels, providing clear policy guidance and consistent messages are important to build confidence in the economy and to contain inflation expectations.
Undoubtedly, when economic agents perceive the central bank as a credible authority, they will be more likely to align their behavior with monetary policy objectives, which will lead to more stable macroeconomic outcomes.
Where Are We Heading?
In the post-pandemic period, as a result of the combination of heterodox economic policies with extraordinary conditions around the world, the Turkish economy started to experience the inflationary effects of the rapid depreciation of the Turkish lira against foreign currencies, increases in financial resource requirements and costs, and all these combined.
With the strengthening of inflationary tendencies and the lack of appropriate interventions and delays in intervention, the economy faced deterioration first in the expectations and then in the price-setting and perception behavior of economic agents.
For those who visualize the cockpit of an airplane, what happened in the economy in this process can be described as follows: The plane’s autopilot is disengaged, turbulence ensues, and at the same time one of the engines fails.
Let us first ask not “what is needed” but “what is not needed”. Certainly, there is no need for a pilot who panics and presses all the buttons. Because such a behavior would cause panic among those on board, perhaps causing oxygen masks and various warning systems to be turned on and actions that would put the plane in a more difficult position.
Turkey already has one of the lowest levels of trust among the world’s societies. However, research shows that the function of trust in the social sphere in countries is a kind of glue or filler. Therefore, as the level of trust declines, things become more difficult in many areas in societies, and one of the most important facts is that productivity in economic activities decreases and costs increase.
When you add to this the breakdown in the relationship of trust between the monetary authority and economic agents, not only do the costs increase, but also the reflexes that will enable economic policies to work and guide the economy are lost.
Searching for Solutions
At this point, we can talk about the steps to restrict credit cards, which are envisaged to be utilized in the fight against high inflation and have recently become the main agenda of the public.
While Turkey closed the year 2023 with an increase of approximately 120 percent in the use of credit cards, debit cards and prepaid cards compared to the same period of the previous year, individuals and firms have become able to sustain their lives and activities by utilizing credit cards in response to the rapid increase in the prices of goods and services. The fact that the institutional mechanisms that could control inflation have become dysfunctional has led to the focus on credit cards and the introduction of various restrictions.
While measures such as the abolition of installments, reduction of limits, rearrangement of interest rates, and increase in minimum payment amounts have been evaluated in this context, the fact that some of these measures have been and will continue to be put into practice step by step is inevitable to create results that may suddenly affect large segments of the society negatively.
Predictability and stability are the most important steps to establish confidence in the economy. While policymakers seeking solutions to combat high inflation may consider these options, it is of utmost importance that the public is guided in a transparent and well-informed manner.
When things go wrong or get out of control in the economy, bringing all these options to the agenda at once and taking steps without predictability is like “pressing all the buttons in the cockpit”. In such a situation, an airplane that will not crash may accidentally crash.
If policymakers reaffirm their faith in the functioning of the market mechanism and central bank independence, uphold the principles of transparency and accountability, and prioritize long-term economic stability over short-term political considerations, things will get back on track, even if only gradually. Restoring trust in the central bank will require concerted efforts to rebuild predictability, improve communication strategies and strengthen institutional resilience in the face of external pressures. But if all this is done, the gains will be long-term and lasting.
Confidence and the Future of the Turkish Economy
Consequently, restoring trust should be seen as a fundamental mechanism for the functioning of financial markets, policymaking institutions and social interaction. Central bank independence and credibility play an important role in shaping the perception of trust in the economy and institutions, investment decisions, inflation dynamics and overall economic performance.
In the current environment characterized by increased uncertainty and volatility, it is imperative to restore and maintain trust in the central bank to meet challenges, enhance resilience and lay the foundations for sustainable development. Maintaining the principles of trust, transparency and accountability will be indispensable to ensure the growth and stability of the Turkish economy in the coming years and to sustain social peace and unity.