A Mix of The Old and The New: Will It Be Enough Until the Local Elections?

A Mix of The Old and The New: Will It Be Enough Until the Local Elections?

 

I had the opportunity to chat with business people in Kayseri and Bursa last weekend, who told me that the share of labour in cost increases is no longer within the tolerable limits, so they’ve been trying to secure the same profit with fewer employees. To do that, they obviously require a certain amount of technology, which obviously requires money.

 

But finding money still remains problematic because banks are still reluctant to lend it, because monetary authorities still oblige banks to buy government bonds. Moreover, the Central Bank is expected to hike rates soon and banks are preparing to offer loans with soon to be determined funding costs.

 

The businesses in Turkey are under the illusion that when the CBRT raises rates, the balance will be restored and rates will stop going up. But the fact is that banks calculate their loan interest based on their funding composition and the associated funding cost. Therefore, businesses must realise that when the policy rates increase, the loan rates will also increase. Let me add that banks will be more selective when it comes to giving out high interest loans.

 

“Ultimately, it’s up to the president’s decision, again.”

 

It is crucial to make policy rates relevant again, but it will take at least a few months until a certain balance is achieved. In light of the upcoming local elections, I don’t think that the government will do anything that might hamper growth and create more unemployment. New appointments to the Central Bank and the BRSA show that rational policies will be partially re-adopted and small adjustments will be made to the old model. We could expect some volatility in terms of offering sometimes strict sometimes easier credit terms so as to ensure a continuing growth, under which inflation will hopefully calm down on its own.

 

This was what I meant when I said “don’t expect any drastic changes” before and after the elections. It should have been understood by now that the President’s Office will not let any other group take over the reins.

 

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