A Great Peace Is What We Need, Not a Great War.
“The CBRT has two options ahead. Given that it will not be possible to increase its policy rate beyond 35% this year, it will either reach this percentage in two or three steps by the end of the year, or it will subdue the confusion in the markets by hiking rates by 500 bps at once.”
That was what I said before the Central Bank’s rate decision.
As we know that Central Bank Chair Erkan has good rapport with both the presidential circles and the markets, I would like to emphasize the possibility of the second option. Five minutes after I made that comment, the Central Bank pushed the rates further up by 500 basis points. Will it do it again? We cannot know. Because most of the time we try to guess “what the CBRT will do” rather than “what it ought to do”.
So, the markets improved slightly following the decision, while the exchange rates loosened a little, yet quickly returned to their former level. And the week started with exchange rates climbing to an even a higher level than the last week’s.
Clearly, interest rate decisions are made in coordination between the Central Bank and the President’s Office. These two have apparently reached an agreement to hike rates by 500-basis points in order to prevent expectations from further deteriorating after the government’s harsh reaction regarding the Israel-Hamas war and because due to the fact that the expected funds from abroad will not arrive anytime soon.
It has been more than four months since Mr. Şimşek was appointed as Minister on the 5th of June. Türkiye is still on the grey list and those highly anticipated “tens of billions of dollars” have not been received yet. The government has been following a rather moderate foreign policy to ensure the inflow of funds but, since the desired result was not achieved, our current policy regarding the Middle East, the EU and the US has evidently returned to its usual self. So, it would seem that the government will adopt a hybrid model rather than returning to rational policies.
If this happens, we should expect that policy rates will remain below the 2024 inflation, which is expected to be at least 45%, efforts will be made to prevent the exchange rates from skyrocketing until the elections, and also expect sharp increases in the CPI, exchange rates and interest rates after the elections. It is difficult to predict where a move that will change the conditions will come from.
As Foreign Affairs Minister Fidan said, “tensions will either lead to a great war or a to a great peace.” If war is chosen as an answer, there will be nothing left to talk about. But a great peace would be capable of stopping all sorts of turmoil.
