CBRT, from hawkish to dovish …

Before the CBRT’s interest rate decision released yesterday, almost everyone thought that rates would remain intact. But this time experts knew that CBRT would change its mind.

17 organizations that took part in a survey conducted prior to CBRT decision expected that CBRT would not make any changes to policy interest rate. CBRT decided to keep the rate at 24% in its March meeting before the elections. There was a strong consensus that rates would remain unchanged.

However, another consensus has emerged: According to survey participants, CBRT would reduce rates by 400 bps in total as well as policy interest rates from 24% to 20%. So, I took an immediate look at the MPC meeting dates announced on CBRT’s official website.

The next meetings of CBRT were scheduled for June, July, September, October and December, which means this 400bps cut would be gradually implemented throughout the upcoming months. Then, I tried to make a clever guess: CBRT could release a rate cut decision in its June-July meeting and then continue with the reduction in its December meeting. “How did you come to such conclusion?” you may ask. Let me tell you how.

It seemed to me quite reasonable that a rate hike enacted in the second half of the year would definitely help improve Turkish economy in the last two quarters so the CBRT would implement the second part of this rate hike (400 bps) in December, obviously after a confirmation of such improvement through statistics, in order to support GDP growth in 2020. But, to achieve such success, we will need to ensure a significant fall in inflation rates and strong stability in exchange rates.

That’s why I thought CBRT would skip this month’s rate hike and shape its decision according to inflation and market movements in April and May.

“Experts need to get their acts together…”

So, my forecasts were finally confirmed by CBRT’s most recent rate decision and its press statement. But in the meantime, USD/TRY started to go up. According to some experts, this sudden rise was caused by the fact that CBRT changed its public statement. The non-presence of a “additional monetary tightening” provision in CBRT’s statement was heavily criticised.

I find it quite paradoxical that expecting CBRT to cut rates in the upcoming months while criticising the fact that the “additional monetary tightening” item wasn’t included in the press statement. If some people do object to a rate cut, the removal of the “additional monetary tightening” item from the statement may have seem as an element of risk. I can understand that. However, I find it very difficult to understand why those who were long waiting for a rate cut are opposing to the CBRT’s tone change.

I think it’s a bit early to discuss rate cuts. However, as an outside eye, I can see that experts heavily promoting/criticising CBRT are deeply affected by the current circumstances in Turkey. The best thing we could do here is to keep calm. Let’s take a deep breath and focus on the issue:

  • Those who were expecting CBRT to release a rate cut decision at the following meeting should not be surprised by the omission of “additional monetary tightening” statement. If interest rates are to be reduced, then we should give up monetary tightening anyway.
  • Those who are opposing to a rate cut within this year should be clearer about the fact that they are actually worried about the upcoming rate cut, instead of complaining about its omission from the statement.

Here’s my opinion on the matter: CBRT has high expectations for a fall in inflation rate in April and May. If anything that is detrimental to such expectations happens, CBRT may delay rate cut. Otherwise, unfounded rate cuts would bring colossal damage to economy.

You might ask, “Would it be possible for us to see a downward trend in inflation within two months?” Well, we can’t tell for sure whether it is on a clear downward trend, but we can tell that it is not; because the Supreme Electoral Council’s decision will seal the fate of inflation while diplomatic and political events are setting the direction for exchange rates.