Contrary to international institutions’ expectations of a 100-150 basis points cut, the CBRT has lowered rates by 50 basis points.
The Central Bank has shown that it will continue to cut rates in order to keep the country’s annual growth above 2%, but at the same time, it will act cautiously considering the declining reserves. The argument that the Government was using to justify previous interest rate cuts was “reducing inflation”. Those cuts, however, were not serving their intended purpose. They were actually designed to “ensure growth without rising inflation” in a rather complicated scenario.
The fact that this recent rate cut turned out to be lower than expected will obviously have both positive and negative effects on the market, which will also be lower than expected, in proportion to the size of the reduction. This cut has not only increased the cost of keeping the exchange rates under control but it also contributes very poorly to the banks’ profits without increasing the loan interest rates.
“Will Pushing Rates Further Down Work When Economic Growth Is at Risk?”
I think that the CBRT will keep bringing down interest rates on a monthly basis. While the Fed and the ECB took a break from big rate hikes and decided to increase them in small steps, the CBRT seems to be determined to do the opposite.
I expect the Central Bank to continue to cut rates in two upcoming meetings before the election date of 14 May, which President Erdoğan no longer sees as an option. It’s quite likely that the CBRT will introduce two 100 bps cuts to reduce their policy rate to 6.5%, the lowest rate of the past decades. If the elections are held on 18 June, the Central Bank will have another opportunity to further diminish rates.
Considering all of the above, I think the CBRT’s next decisions will be of such nature that challenge logic and reason. And I believe that in order for this rate cut and those that will follow to work, the Central Bank of Turkey must establish a relationship with the banking and financial market based on trust, rather than one that is built on deterrence.