Fed Stopped Hikes. What Will CBRT Do?



According to recent statements from the government:


– Mehmet Şimşek himself has recommended the new chair of the Central Bank.

– A thorough investigation has been conducted into the new candidate and a consensus has been reached regarding the advantage of her being a woman.

– President Erdoğan looks like he has accepted Mehmet Şimşek’s new interest rate policy while he states that he still has not changed his mind about it.

– Apparently, the Government will “do its best” to bring the minimum wage to a reasonable level, allowing wage earners to actually live on.


Based on this, we could say that, unable to withstand pressure, Mr. President had to accept rate hikes, but he thinks that he will turn out to be right in the end. Stressing that the newly appointed Central Bank Chair is a member of Mehmet Şimşek’s team, Erdoğan implies who will be held responsible for any damages that the economy might suffer during her term of office. And the fact that he said “We thought it would be good to have a woman run the central bank” allows us to conclude that he, in a sense, admits the lack of female presence in the CBRT.


My experience tells me that the sole condition to avoid further rate increases in the market is to hike policy rates and improve lending terms simultaneously. With rising complaints from the market, the banks’ obligation to buy bonds will be harshly criticised, in which case, the government will have to make a decision as to whether stop financing the budget deficit through borrowing from banks, or reduce the funding cost of banks stemming from their debt to the Central Bank.


The most reasonable decision would be to lift banks ‘obligation to buy bonds and increase the policy rates, but this does not look like a possibility given the current conjuncture. Because this particular decision forcing banks to buy bonds was made partly by the CBRT, and partly by the BRSA within the scope of macro-prudential measures. As President Erdoğan stated yesterday, “the search for funds continues”, and considering the state of the reserves and the budget deficit, it seems unlikely that the BRSA President will be able to take a step that will help everyone breathe a sigh of relief.


“Interest Rates Rise in the Market While Policy Rates Do Not.”


There are two different perspectives in economic management. We heard with our own ears the economic officials of the People’s Alliance say “The loans we have provided before have not been used efficiently, which made us take more drastic measures now”. While agreeing with this statement, I also see that the allocation of scarce funds to the private sector on the condition that they shall be used for “public financing” has become a clear strategy of the government. I don’t know exactly what sort of regulation will be put into force to deal with this issue, but I know that the Minister of Finance and Treasury has to manage an already determined budget. He may have to require an additional budget like last year, let alone a cutback.


This week deposit interest rates have increased by over 40%. The fact that interest rates have risen before policy rates did shows us that they can rise to even higher levels when the rate hike is announced. Frankly, it would be better if the announcement were made on June 22, but I guess the CBRT expected a “dovish” statement from the Fed regarding interest rates, due to the lower-than-expected US CPI data. However, things took a different turn where we saw a big gap between the decision and the statement.


The comments we will hear until the next MPC meeting will tell us whether this “hawkish” statement yet “dovish” decision of the Fed helped the CBRT strengthen its hand for a rate that will not anger the government but will calm the markets.