Epistemological Rupture Continues
My expectation from the Central Bank is to show that it is aware of what is happening to the economy, not to make premature comments, to tell the things that are going well as they are, without exaggeration, in short, to show that it knows what it is doing. I just hope that the communication accidents committed by Chair Erkan in order to appear sympathetic to the public will not occur again.
According to Fitch Ratings, Turkey’s credit rating will not undergo any evaluation until March. The second evaluation will be in September, which means the first evaluation will be made before the elections. I think those who expect that Turkey’s credit rating will be upgraded immediately need to wake up and see the reality since they have been setting the bar on expectations unnecessarily high.
The CBRT is expected to hike rates by a 25-bps tomorrow, accordingly, push its policy rate up to 42.5%, which will be well above their 2024 CPI prediction of 36%. However, given that the markets’ CPI expectation percentage is at least 45%, the hike will not be quite satisfactory. It was important for the Central Bank to stick to gradual rate increases in terms of showing their “determination”. However, they failed to achieve the intended goal because of both political reservations and the fear that raising rates to high levels quickly would cause a bit of a shock wave.
The thing is people still compare the official inflation rate with daily interest rates. No matter how incorrect this perception is, it is widely accepted because people no longer trust in public institutions and consider inflation expectations 12 months from now rather unrealistic. If inflation is still above 60% but interest rates are below 50% by March, credit rating agencies will lay an even heavier criticism on the government.
It is important for regulatory authorities to see the inevitable and do it immediately. Only by this way they can achieve success. If the CBRT had not taken a gradual approach to raising interest rates, inflation and interest rates today would be at lower levels. Still, I do not wish to criticize them too harshly because they might have refrained from making a drastic move that could put themselves on the line, having seen that the government has not been prioritizing the fight against inflation vis-à-vis their ever-expanding monetary policy.
It is not difficult to guess that the government’s reaction will be rather harsh if the CBRT continues to hike rates three times in 2024 despite the upcoming local elections. Given the present situation, I could say that the current hybrid model is likely to be abandoned. I’m afraid we have a challenging time ahead where foreign exchange rates and interest rates will rise simultaneously.
The steps that the economy officials will take in this process will reveal that whether they are genuinely brillant or not.
