Possible Rate Cut and its Possible Outcomes

Statements from Ankara and various related messages show us that another rate cut is due for Thursday.

According to rumours and those in-the-know, we might face a rate cut by 250-300 bps, to which I think, no one would object. I also think that exchange rates will remain unchanged, at least for a little while more.

Last week, when I appeared on television people asked me, “Could rate cuts lead to inflation in the medium-term??” I did my best to provide an answer as accurate as possible.

In case rate cuts create movement among consumers, private sector too would join the price hike campaign that public sector has gladly continued so far, which means a rate cut would possible raise inflation, instead of lowering it; because, producers won’t hesitate doing what they need once the demand is high again, especially after energy as well as some goods and services price rises.

“We shall avoid being so stingy if we want to cut rates…”

Export data indicates that our export performance hasn’t been so bright lately either. We observe a rise higher than 3 percent compared to last year’s January-August export performance. And in August this year, we can see a rise lower than 2 percent compared to the previous year. We have experienced such undesired figures during the period 2014-2017. Global concerns as well as the political fragility in Germany and UK, two of our biggest trade partners, currently bring negative impacts on Turkish exports as the biggest contributor to GDP growth. All these details lead us to come to the conclusion that exchange rates might start to liven up again with the end of summer tourist season, which would obviously cause inflation to rise along with exchange rates.

In such case, CBRT would lower rates to the lowest level possible and establish ground for future possible rate hikes. Being so hesitant and stingy when cutting rates may cost experiencing us higher levels of interest rates in the future.