The CBRT has two options ahead:
– Cut Interest Rates
– Or Keep Them Stable
Although I’m tired of the “What will the Central Bank do?” question, I will do my best to provide some answers. As I always say, if what needs to be done is not done in the first place, a delayed action will not be of use.
Interest rates cannot be hiked, if they are, the Chair of the CBRT will pay the price. Although the Chair and his team seem like they satisfy the demands of the government, it is hard to believe that they would choose to make themselves the scapegoat by raising interest rates of their own volition or at the suggestion of others. So far, their decisions have been quite flexible and practical.
So, could interest rates go down? The Central Bank has always this option, but whether the CBRT is powerful enough to prevent the exchange rates from going up and to maintain the free market economy is in fact arguable. I suppose they will resist any suggestion for lowering the rates and take a “practical” stance, instead of a display of power which may lead to unexpected side effects.
Therefore, it is my belief that the CBRT would go for the second option: keeping the rates intact. By doing so, the Central Bank officials will be both avoiding actions that might stir up politics and cause the exchange rates to soar even higher before the elections and they will also besupporting the President’s “interest rates will fall further” promise, which will thus mean “interests will fall further if we are re-elected”.
Obviously, these are predictions are reasonably and logically based on the past decisions and approaches of the CBRT. However, under today’s circumstances, we should always “expect the unexpected” even when we have rational expectations.
The actions taken by the Central Bank to weaken people’s rational expectations in critical times have become a daily routine in Turkey. Maybe it’s because every moment of our lives has become “critical”.