Central Bank decision and Brexit… (Hold on ! We’re trying something new!

Government reduces the money supply to prevent people from buying foreign currency and lowers the taxes because of inflation. And where this course of action could possibly lead to? There’s an old TV ad where a chemistry teacher pours different substances in a test tube while students singing, “Be careful professor! It might explode!” I think you can guess the rest.

Announcing that unemployment rate is increasing, TurkStat also stated on Monday that industrial production decreased 6.5 percent compared to the same quarter of the previous year. Obviously, I’m not at all surprised by this decline since I’ve already told you that the performance of manufacturing industry as well as other industries would turn out to be negative.

This data indicate the presence of negative growth in final quarter of 2018. Despite this very fact, however, I still expect a growth rate between 2.5% and 3.00% in 2018. We could not possibly be shocked to see a lower rate as inflation is falling further after all. We should be thankful. Well, of course it’s just a joke!

As you may remember, Government announced its measures to enliven the economy in November, which shows that Ankara has noticed this decline in production capability and started to set some measures back then to prevent it from further happening. However, the fact that Government has also said that tax cuts implemented in November will continue to be in effect over the first three months of this year indicates that the problem may not be as small as we think. All these measures show us that the cabinet is closely monitoring this economic slowdown and making attempts to stop it.

“Now that Turkish growth faces risks….”

So far, everything seems to be working fine. However, simultaneous actions by Central Bank and Finance administration, which are tightening monetary policy and tax cuts, is not something almost unheard of. Therefore, if Turkey really faces a big growth risk, immediate support by CBRT might be rational. Lowering interest rates however, although useful for easing cost of funds, it may also trigger a movement that could lead to a rise in exchange rates.

Most experts believe that it would not be wise to reduce rates without core inflation eases to lower percentages. And I happen to agree with them. However, authorized officials in Ankara get to see the numbers before anyone else, before they are publicly released.

If data retrieved from markets does confirm a slow-paced economy, then maybe CBRT can move rate cuts to an earlier time, which would not be surprising for anyone but might cause some trouble in terms of timing as markets would be caught completely off guard. It is not the right time to make any move, especially one that involves ill communication.

I said, “This won’t end here” after Brexit Vote results that sent a wave of shock reverberating around Europe. On June 24th, 2016, I said, “UK might step back from the Brexit brink” For further details about my statement, please see the link below.

This justified statement of mine was based on my experience I acquired during the long years I spent in UK, where I also found the chance to examine closely the British political system. And it turns out that I was right all along. Also, it doesn’t take a fortune-teller to guess that Theresa May will face no-confidence vote and this defeat could bring about general elections.