One more warning wouldn’t hurt…

Interest rate discussion gets boring… But, here I am going to share with you my opinions about the Fed and CBRT decisions one last time.

According to most experts, the Fed will cut rates one last time before 2020, for a couple of reasons: First of all, American business environment has no complaints about the US interest rates level. So, cutting rates further would break private sector’s motivation for increasing profit. On the other hand, rate cuts do not decrease the share of interest rate payments in public expenditure volume, they do the exact opposite, because, public sector keeps borrowing as long as the cost of borrowing remains low and it keeps expanding instead of shrinking. Therefore, the Fed will quite likely cut rates one more time to avoid falling into the liquidity trap and to maintain competition in private sector.

Obviously, the Fed’s actions bring direct impact on Turkish economy. CBRT is perfectly aware of the current circumstances. The improvement in Turkish private sector is just beginning. But, the public sector is facing a serious liquidity squeeze. That’s why it seems unlikely that the present financial policies will contribute to GDP growth in the short term. So, CBRT may have to keep interest rates down. But, it should pay great attention though when cutting rates.

“Comments may be spot-on but forecasting isn’t easy…”

CBRT didn’t miss the opportunity and used the basis effect-led trends very well so far. It cut rates in a “pre-loaded” fashion, thus helped Banks and Financial Institutions while greatly contributing to the GDP growth. Although I tend to object to the “determinative role” of inflation rates, CBRT must pay attention to price movements since no other approach has been implemented so far.

Unfortunately, in popular perception, inflation isn’t falling at all. So, lowering interest rates to single digits without even taking into account an unconvincing inflation rate may disrupt the balance. Well, it’s easy for us to say these things. We should however discuss the highly anticipated decision of the Fed.

Fed will probably cut rates by a further 25 bps, which might by the way lead to a decline in the parity. Its impact, however, would not be very strong since markets seem more relaxed due to Holiday season. Parity may fall below a level of 1.10. CBRT may cut rates a little further as a gesture of “boosting morale”, lowering rates from 14% to 13%.

However, there are rumours that CBRT may lower rates down to a 10% knowing the fact that people do not expect a rate cut next year, and as an attempt for achieving the “single-digit interest rate” target. The fact that CBRT has decided to increase the number of meeting for the upcoming year shows there is a possibility that CBRT could reduce rates, maybe not to 10%, but to at least %11-12. The government is making efforts to achieve its single-digit inflation target by the end of next year, international institutions, however, do not seem so very sure of this.

So, it’s important to make interest rate decisions without damaging the world’s perception of Turkey.