Central Banks Face Tough Choices.

After the CBRT’s February decision, it was obvious that the markets would be able to shoulder yet another rate cut. The escalating tensions in Russia-Ukraine war, bank collapses and the fact that the inflation risk remains intact are of course wise reasons for keeping the interest rates unchanged. But the real reason, I could say, is the exchange rate movements.


Turkey’s current monetary policy receives heavy criticism, especially from international institutions, leaving us with the risk of having our credit rating once again downgraded. If, under these circumstances, the CBRT decreased rates again, it would both lead to further rise in exchange rates and cause the country’s sovereign rating to be pushed down to “C” before the elections.


Even though I always say that rating agencies are political institutions and they would refrain from doing anything that could antagonise the Turkish Government, unless Turkey takes an unwise action, I certainly believe that the CBRT administration understands that it would not be practical to take bold and pointless steps by relying on the rating agencies’ stance. As the Federal Reserve and the ECB continue to hike rates cautiously but decisively, Turkey’s Central Bank seems to have perfectly comprehended that trying to satisfy unproductive expectations benefits no one.


Having read the CBRT’s press release, following their rate decision, which is more or less the same with the previous ones, I will not make a detailed analysis of it at this time. But I must say that I disagree with their “Earthquake will not leave a permanent effect in the medium term” statement. It is important to encourage people, but saying unrealistic things is not something that can be acceptable. Indeed, after the Central Bank’s decision, exchange rates continue to remain stable.


I think it would be reasonable to expect that Turkey’s economy officials will carry on with increasing interest rates by gradual increments until 14 May.