CBRT’s tough decision

GDP growth data was released Monday, followed by the release of inflation figures yesterday. People saying, “It turned out to be lower than expected” or “It turned out to be higher than expected” puts a smile on my face. What did you expect anyway?

First, let’s take a look at GDP: Economy looks like it has shrunken thrice in a row based on results obtained using regular calculation methods. On the other hand, there’s a seasonally adjusted rise compared to the previous quarter.

As a matter of fact, riding for a fall in the final quarter of the previous year, Turkish economy slowly starts showing improvement indeed. However, any positive growth in any quarter will not be enough to help the economy thrive. To achieve substantial improvement, we need the annual GDP growth rate to turn out at least 0%.

The fact that GDP growth rate turns negative despite public expenditure and imports’ contribution to economic growth shows that there is a major structural problem, rather than a conjunctural one. As construction industry continues its sharp decline, the undeniable fact better reveals itself: Investment Expenditure and Household Consumption Expenditure have shrunk as well as Services and Industrial Sector.

“CBRT will focus on growth rather than inflation…”

Now, let’s take a quick look at inflation: Actually, I was surprised to see that CPI turned out to be quite differently than Istanbul Chamber of Commerce Cost of Living Index. Yesterday on television, I said that the Cost of Living Index will not fall below 15% per year. This was a close guess indeed since I wasn’t expecting inflation to turn out to be lower than one percent.

The recently released inflation rate will obviously not boost morale before the CBRT’s Monetary Policy Meeting on September 12th, 2019. Apparently, economy goes in a downward direction but a trend hasn’t been formed yet. With price rises for several consecutive weeks, CPI may start to rise again as of December. But, what will happen then?

Due to Finance Policy’s incapability of supporting GDP growth, CBRT may decide to cut rates even though soon-to-be-released inflation rate will not be satisfying enough for anyone. In short, CBRT will be caught between the decreasing GDP growth and higher inflation.

I think CBRT seems more likely to cut rates considering CBRT Chair Uysal’s “We will support economic growth” statement. The Chair would breathe a sigh of relief indeed if he cut rates in October. However, he may choose to do it now and consequently suffer criticism. A thrilling wait is ahead of us until the CBRT’s Monetary Policy Meeting on the 12th of September.