2020 will be a tough year for the CBRT…

Unsurprisingly, Turkish Central Bank has cut policy interest rates rate by 2 basis points to a range of 12%. The fact that the CBRT did not held a meeting in November has given everyone the opportunity to say whatever is on their minds for almost 90 days. That’s why we are so confused right now.

According to some experts, CBRT would attempt to lower policy interest rates to single-digit under influence of President Erdoğan and Ankara. However, I’ve always pointed out that, as an institution that considerably contributed to GDP growth without engaging in any conflict with anyone so far while helping financial institutions breathe a sigh of relief, the CBRT would never take a drastic action.

However, I think this decision is an early sign of a highly possible rate cut towards single digit in 2020.

On the other hand, CBRT’s statement on its interest rate decision shows that the Central Bank has hopes for a continuous improvement in inflation and GDP growth.

You will never take the right action unless you go beyond the ordinary…”

The fact that CBRT cut rates a little more than originally thought neither caused any scary side effect nor led an ascent in FX rates. Whereas everyone thought, before the release of the decision, a greater cut than 100-150 bps would bring inevitable trouble. I, on the other hand, knew that the real trouble would emerge if CBRT cut rates by 400-450 bps. On social media, many experts have claimed that Turkish Central Bank would adopt single digit policy interest rates before the end of the year.

As I mentioned above, given that CBRT said they would convene 12 times in 2020, their efforts to lower policy interest rates to single digit will probably continue throughout 2020.

By the way, CBRT will not feel so comfortable in 2020 since it cut rates in a “pre-loaded” manner even before witnessing any decreases in inflation. The fact that the CBRT has increased the number of meetings in 2020 shows us that it will, from now on, take a good look at what is going on with inflation in Turkey and then make an interest rate decision.

CBRT faces two major elements of pressure:

  • Government
  • Inflation’s persistence for not going down

As a matter of fact, these two elements of pressure will start to move interrelatedly. Seeing inflation remaining unchanged, the Government would probably say, “Inflation had immediately fallen when you cut rates last year. What are you still waiting for doing the same?” In the meantime, CBRT may decide not to cut rates on the grounds of persistent inflation. If CBRT does that, sadly, there would be only one option left: government pressure.

Problems become unavoidable when there is a conflict between the economic reality and stereotyped phrases.