Another emergency cut to interest rates first by the Fed and then by Turkish Central Bank increase panic and fear in markets. Everyone is now operating by an “emergency code” I’ve already said that CBRT would attempt lowering rates to single digit. I won’t say, “I was right” as I don’t like people who talk like that either.
Obviously, the only thing Central Banks can do now is to keep the cost of funding as low as they can while increasing the liquidity. Any other measure apart from these two will not bring any genuine effect.
So far, no country has really tried to support the markets by cutting taxes. Although postponing Income and Corporate Tax payments seem like a well-intentioned move, the government doesn’t really give up collecting what it is owed. That’s why it chooses to use monetary policy instruments as a tool for intervention. If they can’t achieve the desired goal, they will probably have to implement tax cuts, which would obviously lead to an increase in budget deficit. Borrowing would stand out as the only option if government spending increases while taxes are cut down in the midst of an economic slowdown. If all of this become a reality, it would inevitable for interest rates to go up.
“Let’s leave the Mega Projects aside for a moment…”
If Central Banks continue to keep interest rates low, we should expect a larger gap between market interest rates and CBRT’s key policy interest rate, which would be complicated to manage.
At this stage, I believe that it would do more harm than good to criticize measures to control the spread of the virus and its side effects on economy. The only thing we could do is to offer advice. For instance, I advise government not to launch any mega projects under the current circumstances. Otherwise, any such attempt would be considered unrealistic behaviour, nor a power play, and may result in all efforts made to fight the virus so far to come to naught.
I would like to point out once again that we are going through a period where we should use our resources as wisely and as efficiently as we can. It should also be known that investors will return to markets once the panic is over. The next economic improvement will begin in the Far East as it did in 2008 financial crisis and will slowly spread across the world. In other words, we’ll first see Chinese and Far Eastern stock markets gathering their strengths back and then the US markets.
I’m telling you that the storm will end one way or another. But it may only end when global markets are properly improved. That’s why I’m trying to keep myself constantly updated with the latest developments in far eastern markets. But first we need to hear some good news on the coronavirus. Then the economy will heal, maybe even faster than expected.