No matter how strong were the discussions about the CBRT’s rate decision, they luckily did not bring too much of an impact to markets. CBRT has released its decision, causing markets to fluctuate for a while and eventually calm down.
The expected happened. CBRT had to choose among the inflation rate which would continue its downward trend over the next month due to basis effect or Turkey’s non-healing GDP growth issue or the banking sector struggling with non-performing loans. Central Bank made the right choice and cut rates by 325 bps to support GDP growth and banking industry.
Some people, however, expected CBRT to cut rates by around 500 basis points. I, personally, was rather concerned about whether CBRT would go for a rate cut below 200 bps since markets had conditioned themselves to face a rate cut between 250 and 300 basis points. But, luckily, CBRT did the opposite of what people feared, releasing a decision to satisfy expectations.
To choose what to do next, we’ll have to first investigate the inflation and then precursor data on GDP; because, there has been a certain perception among people that CBRT aims for a 2-3 bps real interest rate. Therefore, it seems like the market is about to accept a nominal interest rate 2-3 points above the annual inflation rate target. So, we shall expect inflation data to verify each rate cut. The strong correlation here must remain intact.
I previously said on television that the business world should better prepare itself for lending rates below 20 percent. It looks like companies with transparent balance sheets, convincing cash flow statements, an inspiring narrative and strong infrastructure will benefit from this reduction. We ought to heed the warnings of the United States Secretary of Commerce Amerikan:
“GDP growth and inflation data will be monitored closely…”
The price hikes in Turkey are not led by demand. There’s a serious rate of cost-push inflation. So, it’s not possible to reduce inflation by hiking rates. However, a sharp cut in rates may give industrial sector to raise prices as the industrial companies are about to exceed their capacity limit. If some Turkish sectors that have been struggling with high cost problems for a long time now decide to hike their product prices with the increasing demand, they may only be able to benefit from the positive aspects of the basis effect for a short time.
As I mentioned earlier, CBRT currently tends to support GDP growth, instead of fighting inflation. So, while controlling price movements, on the one hand; on the other hand, it keeps a very close track of precursor data on economic growth.
By the way, banks could finally breathe a sigh of relief thanks to the recent rate cut since they’ve been offering their customers debt restructuring opportunities for a very long time now, which is a difficult task indeed that requires some equity injection. Banking Regulation and Supervision Agency (BDDK) will probably have to take action about this matter very soon.