As Cause and Effect Relationship Fundamentally Changes…

As Cause and Effect Relationship Fundamentally Changes…


Once upon a time, in summer, factories would temporarily stop production, movement in big cities would slow down, monthly inflation rate would be very low or even drop to negative figures, then demand would revive again as autumn begins. This pattern remained intact in the late 1980s, and the early 1990s, when I started my first job.


But things started to change after the 2001 financial crisis. Capital markets would no longer need the real market to generate funds, the tertiary sector of the economy became more active than the industry, the whole year became the tourism season, and digitalism started to dominate every aspect of our lives. Would you like to know how I noticed that the change was coming? When people continued to buy ice cream even in winter.


The 21st century marked more and more investment in digital transformation: smartphones became capable of performing anything you might think of, airplanes and all kinds of vehicles became equipped with wireless networks, all of which has inevitably increased the number of transactions. As long as financing existed to perform these transactions, demand remained alive. No one complained about it while price hikes remained at reasonable levels. However, when first the pandemic and then the Russia-Ukraine war hit the world, these major events drove people and retailers to stockpiling and naturally led to price increases. The consequence was a super growth in overall demand throughout the whole year. But cooling demand in the rapidest way possibly would cause both growth problems and increasing unemployment, hence political problems, due to which the US and the EU hesitated to combat inflation at first. Consequently, because of the governments’ restraints, central banks were late in intervening in inflation. Now they are being cautious in raising interest rates out of recession fear.


“Constant Intervention in Markets Is Never Good…”


In market economies, central banks are not allowed to intervene directly in goods and services prices. So, they have to fight inflation by raising rates and implementing a contractionary monetary policy. The Turkish Central Bank, for instance, has tried numerous methods to reduce inflation over the years. These included macro precautionary measures designed to dynamically manage money markets by constantly increasing and lowering interest rates, or new instruments, which resemble foreign currency but actually it is not, aimed at reducing people’s interest in buying foreign currency, or direct interventions in real markets, less credit approvals. And, the Government continued to further feed inflation through higher wages and higher spending. It raised taxes to reduce the budget deficit, causing the cost of living to climb even higher . This time, it was announced that salary and wage adjustments will be made again.


According to my calculations, July inflation rate will turn out to be quite high, likely to hit double digits. Just as expected, the Central Bank could not push its policy rate above 20% in its August meeting. So, they will continue to increase loan rates and reduce loan approvals until the end of summer. With a tight monetary policy, the country will obviously attract some foreign currency during the tourist season.


Candidates will be revealed in October-November before the local elections, presumably expected to take place on 31 March next year. In the meantime, the Government would surely make efforts to avoid low demand or a decline in growth. Therefore, we could expect another expansion of access to credit as of November at the latest. Although the government might try to make the KKM instrument unappealing to banks, I think that the public’s interest in this particular scheme will continue. I also guess that banks will increase their TRY deposit rates to dissuade depositors from putting their money in the KKM. However, they will have to offer interest rates much higher than those offered by the KKM under the circumstances.