CBRT released its decision yesterday and it was no surprise to us just as I expected.
I kept saying that the CBRT should cut rates by a maximum of 100 points. Although according to some, Central Bank should have avoided cutting rates at all, I think it was a fair decision to give CBRT some credit considering it’s hard to manage financial markets and perception at the same time. Technically, it would be suicidal to reduce rate to single-digit without even confirming expectations for single-digit inflation.
CBRT managed the process pretty good so far. Markets now have more confidence in Central Bank Chair Uysal and his team. Any drastic action would damage the perception, and we would end up losing all the things we built so far. Luckily, CBRT made a wise choice. But, they are entrusted with a very difficult task since Turkish public finance, these day, is not in a very good shape.
The budget realizations in 2019 showed that public finance isn’t strong enough to support the private sector. Turkey has run a serious budget deficit and now it’s running Primary Deficit again!
However, I do not think that any further expansion of the public sector will neither have any good impact on demand nor it will increase the inflation. In the 1990s, the government was very supportive in terms of improving GDP growth. Bu today, a large part of the consolidated budget goes to institutions outside the ministries. And these institutions are using these funds to cover their operational expenses. That is to say, government investments are extremely low vis-à-vis large levels of government spending. But this is not the squandering of our resources since these expenses are mostly made to finance daily expenditures.
“It’s up to interest rates now as the Fiscal Policy is stuck in a deep economic slump…”
When considering the management of buildings and facilities owned by the “State”, and all other expenses including the salaries and fringe benefits of civil servants and government officials, I can easily say that it’s not possible for the government to shrink at this stage. That’s why I do not expect tax policies will not contribute positively at all to GDP growth. I even suspect that the government’s borrowing policy may soon start putting pressure on capital markets, as a result, affecting interest rates and GDP growth as well.
In the meantime, I don’t want to overlook the fact that inflation rate may rise due to cost-driven problems. If the government continues to diversify data and increase their number gradually, cost-push inflation would be inevitable.
All these factors considered we can better see the pressure on the CBRT. It can also be seen that CBRT’s balance sheet has considerably grown and its emission has been increased largely since the last year. Apparently, some part of the reserve fund and the dividends paid to public sector was covered by emitting more cash and non-cash money.
In short, I think CBRT did the best it could so far. I thought they would not make anything to upset such well-managed balance with a shocking rate decision. And they did not.
