It looks like the CBRT decided to surprise and even shock us all again! However, some developments that recently took place helped to justify yesterday’s rate decision.
While no one was expecting a change in interest rates, this drastic rate cut can only be described as a shock, not a surprise. I don’t know how to explain why the Central Bank is doing this in the midst of major concerns about the institution’s rate plan.
As the CBRT’s interest rate cut to support the government’s economic model causes exchange rates and inflation to stay at high levels, there have been some short-term developments that helped the Central Bank to insist on its policy. The recent relief in the markets, caused by a slight increase in foreign currency reserves in the last week, leading CDS premiums to drop from 900 to 600, has apparently resulted in a more conciliatory stance by the banks regarding loans and interest rates for the last week. In order for this behaviour to be permanent, foreign currency reserves should continue to increase, exchange rates should remain calm, and we also need an improvement to Turkey’s external vulnerability which is increased by current accounts. All of this can be achieved if the CBRT properly implements its monetary policy, however, instead of convincing the government, the monetary authority acts in a manner that makes people question its autonomy as a central bank.
Surprises might continue until the end of the year…
The outcomes of the meetings between the Central Bank and Private Sector show us that the monetary authority no longer listens to the real sector. Today, private sector in Turkey tries to survive the day by relying on the data released by TurkStat This being the case, the private sector prefers to talk this issue directly with the public banks, since public banks know the real sector better than any other institution. They know very well that no one is granted a loan at the low interest rates mentioned in Central Bank-Private Sector talks. However, they are doing everything in their power to distribute the limited resources in a balanced way. This ordeal happens every day and it starts all over again each and every morning.
In the midst of this struggle, the maturity mismatch between deposits and loans has been reduced to a minimum. Banks give out loans with very short terms and they were also able to extend the maturity of the deposits thanks to the FX-hedged deposit scheme. And the gap between funding costs and loan interest rates helped the banks make unprecedented profits. Nevertheless, private banks still act cautiously about loans that are likely to be problematic and those that will need restructuring due to possible problems in the near future. Therefore, this relief in loans and interest rates does not seem to last long.
Encouraged by the July inflation rate and recent global developments, Turkish Central Bank lowered the interest rates. I can think of only one reason for the CBRT to do this: “All Central Banks in the world are increasing interest rates. Eventually, we will have to stop cutting rates any further and do the same. So, let’s trim them as much as we can while we have the chance.” This must be the only explanation for their rate-cut appetite.
Needless to say, we have to wait until 2023 for a change in monetary policy. No matter how many difficulties the money market will face this year, it looks like the Central Bank will not take a step back from this model easily.