Another week comes to an end amidst growing tensions in Idlib and controversial central bank decisions. But, we’ll talk all these political and judicial issues at a later date. Today, I would like to make a deeper analysis of the CBRT decision.
Although CBRT’s interest rate decision wasn’t actually surprising at all, I’d say that the Central Bank is pushing its luck, if you ask me. CBRT should have avoided negative interest rate, especially now when there’s not any perception about the possibility of a single digit inflation.
What would we do if we were the Central Bank? The answer is simple: We would cut rates by a maximum of 25 basis points and wait to what happens next. But, the CBRT might also be thinking that: “If I am to increase rates over the upcoming periods, I should implement lowest rates possible when I still have the chance”.
Obviously, the reaction of the market was a sharp rise in exchange rates, which were already ready impatiently for going up since the last week. Although USD/TRY’s reaction isn’t considered to be too drastic, CBRT should better make more careful decisions in the future.
“We’ll talk CBRT, every day and every week…”
It’s not easy to be in a position where you are expected to please everyone. You should avoid making political leaders unhappy considering that GDP growth is their top priority. You should also avoid spoiling financial markets as their stability is essential to economic stability.
As I always say, the fact that Turkish fiscal policy is currently unable to support economic growth leaves CBRT no choice but to cut its policy rates.
“Becoming an effective leader” is as important as “doing the right thing”. CBRT could have skipped interest rate cut but the fact that Central Bank executives didn’t want to antagonize the Government while trying to maintain the market stability and save their chance to increase rates in the future when deemed necessary has made this 50 bps cut inevitable.
We are about to cross a critical threshold. From now on, I will discuss every CBRT decision and see whether they are consistent with monthly inflation rates. Given the fact the CBRT makes its decisions on a monthly basis, there will not be a single week when I will not discuss CBRT decisions.