Better be careful with interest rates

The late Professor Erdoğan Alkin used to keep a wary eye on interest rates, always warning us into being cautious about them. To those who do not know how to use them, interest rates are just like a grenade. But under today’s circumstances, interest rates seem like our only weapon.

As you may know, I have stated in yesterday’s report that the current state of Financial Policies in Turkey is far away from providing any support. The only thing we are left with is CBRT’s policy interest rate. Although they seemed too radical to some people, Turkish Central Bank’s moves to reduce interest rates have been backed by markets as well. I have also declared my support for these wise and bold measures both on television and on my official website. But now, we are about to go through a difficult period.

You must have noticed the recent rise in exchange rates as the CBRT’s Monetary Policy Committee meeting approaches.

According to some, S-400 missiles, which are currently undergoing test firing, are the reason behind the sharp FX ascent. But, this isn’t the real issue here. Rumours say that we may soon face a drastic rate cut again.

“Interest rate cuts must enable financial institutions to monitor them without difficulty…”

Recently, someone told me during a conversation that banks could offer up to 14 percent rate in short-term Turkish lira loans. When an experienced business person suggested that he should ask for a longer term to maturity. The borrower’s answer, however, seemed rather interesting to me, “Rates might hit single-digit again. Why should I pay more?” So, apparently expectations are drastically high at the moment.

But, I think that CBRT should focus mostly on inflation in 2020. As the positive outcome of the basis effect is now over, a double-digit inflation against single-digit policy rates would bring pressure to Turkish economy. In the meantime, Turkish and Qatari central banks have agreed to increase the overall limit of a currency swap deal from USD 3 to USD 5 billion. The core objective of such agreements is to support financial stability.

In short, it would be a real “shock”, not even a surprise, if CBRT decides to cut rates by 250-300 bps. It’s hard, and still too early to tell whether it might be possible to eliminate FX rises with Swaps. However, Turkish economy would face severe complications if CBRT reduces rate to single digit in its December meeting. I just hope this won’t be the case. Things have been going pretty well so far, so let’s not rock the boat.