Yesterday, CBRT held a crucial meeting. Turkish economy officials were signalling that December would be the month for a decline in inflation rate, which was actually expected to go down by the middle of the year. Everyone had an opinion about how long this process, in which prices are at least thrice higher than interest rates, would continue.
Foreigners did not expect any change in the key policy rate until the first quarter of next year. Promises were being made in Ankara that made this expectation even more tangible. Statements like “Commodity prices will not rise all the time, the war will eventually end, and the supply chain disruptions arising due to the pandemic will be fixed,” made by the economy officials naturally lead to the impression that inflation is expected to improve on its own.
The government is actually taking steps in terms of providing support and taking measures, but it fails in either coordination or timing. The support granted to the farmers was important, but it came too late, it had to be done before trying to prevent price hikes through imports. Cutting indirect taxes was also an important, but it should have been done at the very beginning of the pandemic. Effective supervision of the market is of vital importance; however, it should not be done by pressuring only the end-product sellers.
“Does the Cheap Financing Model Really Work?..”
It looks that the Government has decided that the most effective intervention is to provide cheap financing. However, this requires funds input. Trying to solve this problem by simply creating more money could result even in greater complications. On the other hand, when the Government borrows more funds, this time, the interest rates on debt securities in TRY and foreign currency climb up. In short, interest rates are increasing on the surface, but of course, they remain at a very low level when compared to the inflation rate.
Apparently, there are concerns that borrowing rates will also rise too if policy rates rise. To stop that, the Government will need to take a step back from the policy it pursued so far, which is something that it does not desire to do. Based on the current state of affairs, I could say that interest rates will be kept at this level for a longer period of time, and exchange rates will be kept at low levels by selling from reserves created through swaps and by suggesting to the market makers that things will eventually improve.
This is a very difficult process to manage, and it will continue or come to an end depending on the impact of the Fed’s interest rate steps, the course of Russia-Ukraine war, and the movements in commodity and energy prices. The CBRT skipped touching rates again yesterday, but I can say that the things may change as of May.