For those who say, “Wouldn’t be better if rates weren’t cut?

Last week, both in my social media posts and television commentaries, I said that CBRT should cut rates by a maximum of 100 points. According to some, however, Central Bank should have leave rates unchanged. Such suggestions that look on paper but are never useful in real life have always seemed funny to me.

  • Central Banks today must handle not only the monetary policy, but also the requests coming from the government. And it’s not possible to make everyone happy. But, it’s easy to make everyone unhappy. Instead of doing that, CBRT chose to cut rates handsomely under the circumstances, easing political tensions and preventing President Erdoğan from being put in a tight spot, only hours before the rate decision.
  • If CBRT didn’t cut rates at all, no decline in the cost of funding could have been achieved. As a result, market interest rates would remain at the same level and would not give any further support to GDP growth. A decline in the cost of funding of both banks and non-bank financial institutions helps increase the loan volume, and drives consumer spending and business investments. Therefore, CBRT has made the right decision by leaving the interest rates intact.
  • The fact that CBRT has cut rates helped preserve inflation expectations as well. Last year, Central Bank had cut rates sharply, having predicted a decline in inflation rate. In its January meeting, CBRT gave the following message: “I believe inflation will fall to single-digit at the end of this year”. Currently, policy interest rates stand at 11.25% while it is expected that year-end inflation will come to 8.6%, which means CBRT has left a real interest margin of 2.65 points in accordance with year-end goals. But, from now on, we’ll have to keep a close track of on monthly inflation rate, because, if CBRT reduces rates to single digit before no one has any expectation for such slashing may disrupt people’s perception of the Central Bank.
  • Turkey’s financial policy seems to be on the ropes for the moment and there’s no one else to give support to economic growth, except for Central Banks and Public Banks. Private Banks and Non-Bank Financial Institutions will decide whether they should provide support to growth or not depending on their composition and cost of funding. Besides, CBRT should have already helped growth considering that GDP is expected to grow at least by 4% in 2020. According to the survey of expectations, there is already some fragility in terms of consumer confidence. Turkey needed immediate intervention to restore it.

In conclusion, I beg to say, that I disagree with those who claim that it would be better if rates weren’t cut at all, for the reasons I mentioned above. But, CBRT has 11 more meetings ahead, which means 11 decisions about the inflation rate, and 8 Fed decision including this month. With this busy and tight schedule, I reckon CBRT would keep rates unchanged in some months, just as a precaution.