From Policy Interest Rate to Credit Interest Rate…

Cut by central banks in policy interest rate naturally leads to expectations for a cut in credit interest rates well. Such market expectations waiting for the Fed to slash rates as well after the CBRT is starting to exert pressure on banks and non-bank financial institutions.

Let’s begin with the Fed: According to most international financial institutions and analysts, the Fed is highly likely to cut rates by 25 bps. Although some people expect a 50 bps cut but they are few in number. There is also a small minority claiming that the Fed will not hike rates at all. In short, everyone is widely anticipating a rate cut.

As I told you before, a rate cut is not actually good news for the U.S. economy even though it will be gladly welcomed by many. If the Fed decided to slash rates, we should listen carefully to the reasons that made the Fed take such decision. The Fed Chair’s post-meeting press conference is of utmost importance as it will give us the opportunity to understand whether this decision was made because the current economic balance reflects a weaker-than-expected outlook, in terms of economic improvement, or whether it was issued with the purpose of eliminating certain risks and challenges awaiting U.S. economy in the future.

If the world has negative expectations for the U.S. economy, which shares 33 % in world total exports and almost one-fourth of global GDP, this would obviously have negative impacts on capital and commodity markets. That is why I have a strong urge to hear the tone of Fed’s press release.

“This has nothing to do with the Laffer curve…”

Meanwhile, in Turkey, business leaders and associations, especially including the Union of Chambers and Commodity Exchanges of Turkey (TOBB) and Turkish Exporters’ Assembly (TIM) are urging the CBRT to cut credit interest rates as well. Rate cuts in personal loans have already begun with consumer loans. I’m sure you’re all getting text messages from banks, advertising their new personal loan rates. Regarding auto and home loans, banks CEOs haven’t issued a decision yet.

Apparently, banks and non-bank financial institutions will make their best to handle this process way more carefully than expected, focusing on personal credit scores as well as cash flow statements.

By the way, some people are criticizing the demands for “tax normalization” on the basis of “Laffer Curve”. Laffer has nothing to do with this matter. The reason why I urge Government to cut taxes is not because I believe the Government will be able to collect more taxes by doing so. Government must stop emptying ordinary people’s pockets so as to enable them to boost their personal savings, which is essential when investing. So, the Government should spend less to collect reasonable amounts of taxes.