CBRT’s rate decision and changing paradigms…

I’ve been noticing economy or finance experts’ approaches towards interest rates recently and I can see that most of the comments they make are still nourished by 20th century paradigms.

As a majority of economists or experts regard interest rates as an instrument used to stabilize monetary market, they think CBRT should not cut rates. I, however, beg to differ with them.

Lately, interest rate’s role to stabilize monetary market seems to be weakened when compared to its performance in its other functions. Its role to heat up or cool down the economy is paramount. Other than that, steps taken to make the cost of funding cheaper help banks and financial institutions make loans float easily that they previously offered at very low interest rates, while reducing the cost of debt restructuring. It may become easier for Turkey to get out of this financial bottleneck if financial policies work in coordination too.

However, economists tend to rather focus on TRY’s stability and inflationist effects when making analysis, which constantly ignores CBRT’s GDP growth-oriented approach. This type of policy has sadly become quite prominent during the office of Süreyya Serdengeçti. As a result of this approach which was supposedly designed to reduce inflation using high interest rate-low exchange rates policy yet in the same time destroying Turkey’s competitiveness entirely, Turkey suffers great damages today. I can say that this policy made Turkey’s economic growth-current account deficit structure even more chronic than before.

In the past, Turkish private sector didn’t have such tremendous amount of foreign currency debt as it has today. Also, Turkey’s dependence on exports was relatively low. It was a known fact that Turkey literally paved the way for 2001 financial crisis by keeping rates as low as possible. However, due to passing-through impact of exchange rates on inflation, CBRT had decided to put interest rate pressure on exchange rates to reduce prices as quickly as possible. The result of a survey conducted by Turkish Exporters’ Assembly back then showed that the fact that exchange rates keep increasing does not improve import performance but the fact that they keep falling constantly do definitely bring damage to Turkish imports”

“Cause-Effect relationships have changed and we are afraid to admit it…”

Despite the fact that Turkish Exporters’ Assembly had shared the result of the analysis with everyone, the rentier class who were extremely happy with high interest rates blamed the supporters of CBRT Executive Team and importers for demanding high exchange rates all the time. But actually importers were pretty upset about falling exchange rates by means of high interest rates. Then-leading economists appearing frequently on TV back in the day said, “There will be no problem as long as current account deficit is properly financed”, underestimating the growing threat. Inevitably, structural problems grew bigger and bigger, ultimately becoming an integral part of Turkey. If Turkey was to achieve economic growth, it had to run a current account deficit; if Turkish economy was to shrink, it had to run a current account surplus.

Today we are reaping what we sow and that’s why I absolutely think that CBRT should cut rates. It will probably do so, a cut by 150 bps, possibly around 175 bps. I just hope CBRT will cut policy interest rates down to 15% maximum. Any cut more than 15 percent would spoil the markets.

If CBRT says, “We can’t know for sure what future holds, especially until December. It wouldn’t hurt to have some ammunition when the time comes for us to raise rates”, it then may take a risky step and cut rates further. However, we should certainly expect a minimum of 150 bps and a maximum of 250 bps cut.