Should we expect a rate cut in July?

The answer to the question above is mostly wondered by two main groups after the CBRT decision yesterday. Those who are mistaken thinking that that the interest rates would go down and those who want CBRT to cut rates… Let me tell you why:

Central Bank was heavily criticized for a specific phrase from its previous press statement. In fact, CBRT was trying to express that there has been a certain improvement in inflation expectations. And most of the experts were positive that interest rates would be cut at least one more time before the year’s end. Therefore, it seemed unnatural to me to negatively react to a statement that is designed to pave the way for a rate cut. I told the experts that:

  • Those who are waiting for a rate cut should not object to this statement
  • Those who do not want a rate cut should say it clearly

Last week, I said on television, “With these inflation rates, it won’t be possible for Central Bank to reduce rates” And, it happened exactly like I said. But now, experts are promoting another argument: “CBRT paves the way for a rate cut in July…”

That’s not what I understood from the CBRT’s press release, which included a certain reference to the lack of demand under inflationary conditions and food prices that are hoped to decline soon. However, if June inflation doesn’t turn out to be lower, even negative and if annual inflation doesn’t fall back to 16%, I do not think that a July rate cut will be an option.

A certain decline in the cost of funding would obviously help Financial Markets breathe a sigh of relief. It’s only natural that banking economists are making warnings about this issue. However, I think it may be more beneficial for everyone of us that the rest of the experts just say so if they have any objection to it, instead of saying, “A rate cut in July is ahead”.

The duty of an economist is not to state the obvious or read the runes, it’s to deliver the right warning at the right time, offer solutions taking different possible scenarios into account.

“Sharing experience with my Pakistani colleagues…”

An idea just occurred to me while I was watching the budget talks on television in Pakistan yesterday. I said to some academics that they should let go of discussing the tax income and do something similar to the VAT action launched in the 1980s in Turkey.

Young generations don’t know this but there was a popular TV commercial in the 1980s, “Do your shopping and take your receipt”. This ad campaign designed to raise consumer awareness has been quite successful, creating an even more efficient source of income than the Income and Corporate Tax.

To achieve this, however, you would need the right financing and a strong retail infrastructure. Today, no government budget in the world is financed only by income and corporate tax. The share of the indirect taxes is slowly increasing. I believe that Pakistan must have set forth a certain condition in its deal with the IMF. However, Pakistan could have talked the IMF into accepting that the indirect taxation would be a more effective way of financing.

It looks like Pakistan PM Imran Khan’s “Financial Milestone” will not meet expectations at all. I’ll keep on talking with every official I meet in Pakistan about the possible risks until the day I get back home.

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