Central Bank Decisions: Questions and Answers...

The Central Bank announced its decision and, as expected, implemented a 250 basis point cut. Now, let's take a step back and look at where we started. However, I will do this by answering questions that have been asked of me for over a year and a half:

"Did the Central Bank make a mistake by raising interest rates?"

The way the Central Bank raised interest rates was wrong. They increased rates gradually due to fears from both politics and the business world that supports them. As a result, both interest rates and inflation rose. They did everything they could to validate the thesis that "interest creates inflation." The inflation they inherited was around 38%, and they raised it to 75%. However, they should have shocked the policy interest rate to a high level as soon as they took office. Instead, they opted for applause. Because they constructed more rational sentences than the previous economic administration, they provided great support to the wrong interest path with the power of their impressive CVs. They created enormous carry trade profits, making Turkey more expensive than even Europe by holding onto foreign currency. When the base effect was insufficient, they hid behind CPI figures that no one believed.

"Wasn't the 38% CPI incorrect when the Central Bank took office?"

I say the same. If the CPI figure is incorrect, then why did they choose this path? Because they didn't want to be left with a bill related to the local elections. Still, the result didn't change. In fact, the rising cost of living affected the elections.

"But the Central Bank raised interest rates just before the local elections."

Yes, they did, but the previous month, they had declared that "the interest rate hike has ended." Then, when foreign exchange began to rise rapidly, they were forced to make a choice. The answer to the question, "Should the currency rise or interest rates?" was clear. They immediately began to control exchange rates more strictly and raised the interest rate just to be safe. However, all of this showed us that they were not in control of the situation.

"Did the Central Bank do wrong by holding foreign currency, wouldn't it incur more damage with FX-Guaranty Deposits?"

We have insisted that FX-G is not a good solution and that the right approach is to resolve the issue with super bonds. The previous administration loaded a hefty bill on the Treasury to prevent interest rates from rising. If they had done this with super bonds, it would have been easier to manage; we wouldn't have had to deal with a monstrosity like FX-G. However, the new administration also created another monstrosity to eliminate the FX-G monstrosity. They discovered that inflation was not dropping, so they kept the exchange rates and, with assistance from TUIK, defined an unrealistic path for themselves. As they held the foreign currency, people rushed for high profits, focusing on exorbitant dollar-based profits without even considering inflation. Meanwhile, the private sector took up massive foreign currency debts, thinking "the currency won't rise anyway," and exporting companies became unable to profit. Not just them, but all foreign currency-earning activities began to incur losses. Everyone adopted pricing or purchasing behavior based on their perceived exchange rate. The gap between the cost of living and inflation increasingly widened. In summary, they created a total of interest expenses, private sector losses, and currency risks greater than the costs of FX-G.

"But if the Central Bank doesn't buy foreign currency, rates will fall..."

"First of all, what is the right decision? Decide, friends." Saying both "thank goodness it’s holding" and "if it didn't buy foreign currency, rates would fall" is nonsensical. If we accept this argument, I would say that to understand what the real value of the exchange rate is, it should "be released." If some believe that exchange rates will fall if the Central Bank does not buy foreign currency, then there’s no harm in that. However, we know that this Central Bank management, like its predecessors, sold tens of billions of dollars to hold exchange rates. No one is hiding this. We also know that they confiscated and placed the foreign currency revenues of exporters, taking first 40% and eventually 30%, into reserves. Of course, even though Minister Şimşek says otherwise, we see that they also added the foreign currency that came through carry trade to reserves. At this point, we witness the Central Bank collecting the TL it injected into the market through open market operations by purchasing foreign currency. Then, it results in a situation of "I made my own bed." The Central Bank is walking a tightrope. Because of the methods it previously applied to exert pressure on foreign exchange, it is now compelled to buy foreign currency. If the currency falls further, there will be no industry left in the country, exports will cease, and Turkey will become the most expensive country in the world, let alone Europe. So, what will happen now? I believe the Central Bank does not exactly know either. They may want the currency to rise enough not to create inflation, but there is no definitive recipe for this. While investors demand high real returns in foreign currency, the out-of-control currency can complicate all calculations. On the other hand, there are a significant number of people who believe that the saying "If the Central Bank doesn’t buy foreign currency, the rates will drop" is an urban legend. I think the Central Bank is also not confident in this. For this reason, they want to set the exchange rates themselves, and this faulty process continues.

"Is it wrong for the Central Bank to call upon Fiscal Policy for help?"

If they are calling for help to "increase taxes so that demand decreases," that is a huge mistake. These are statements made according to the paradigms of the last century. Today, inflation has become sticky due to public burdens and costs. If they are saying this based on the assumption that the coefficients within the CPI will decrease, they are making a major error. Official inflation decreases with the help of such manipulations; however, as long as the cost of living remains high, citizens will continue to distrust the program. I wouldn’t be wrong to say we are subjected to the consequences of critical decisions made by those who live within a limited life experience and social circle. However, if they are saying in good faith that "the public should spend less and create less cost," it would be best if they stated this directly instead of timidly like shy children. There are people who claim that the Central Bank management does not hold back on making statements when necessary, but it always remains just talk. Some truths need to be stated clearly.

"Is the Central Bank making a mistake by lowering interest rates?"

They are making a mistake by declaring an early victory based on CPI figures that everyone has doubts about. No rational person enjoys high interest rates. However, a transition has been made from a controversial interest rate hike path to a controversial interest rate decrease path. As a justification, they point to an inflation target that is clearly distrusted by citizens in expectation surveys. The Central Bank executives, who say "we cannot change the target when modeling," will face a similar development after changing the CPI target five times. It is possible to read this worry in every document of the Monetary Policy Council.

"The Central Bank is lowering interest rates but not allowing lending."

I will answer this shortly. "If it is not going to relax the money transmission mechanism, lowering interest rates is merely for show." If the conditions are not going to improve, then why are we lowering interest rates? Is a similar phrase to "we have made the policy interest meaningless" being used without uttering it?

"Is the Central Bank doing everything wrong?"

I do not have a duty to praise or criticize anyone. Even if they do a few correct things, they unfortunately remain in the details. The critical decisions made based on very old approaches and outdated theses are detrimental to the country. If we hadn't been carrying this burden since 2018, no one would tolerate this team. However, due to the ultra mistakes of previous economic administrations, we are showing patience towards this administration, which at least expresses somewhat more rational words, even if it lacks empathy. However, the actions taken are not as rational as the words they express. The reason media outlets that announced CDS premiums falling below 250 are now reporting rising towards 270 is this: There is a fear that if the current management goes, a management that no one would choose will come.