This is a critical threshold…

Yesterday was quite exciting indeed, especially in terms of the latest developments in Turkey’s economy. Announcing its interest rate decision, CBRT lowered its key interest rate by 50 bps to 10.75%, which were previously cut by 75 bps to 11.25% on January 16th, 2020.

There was, however, an interesting detail: The exact same sentence from the CBRT’s last press statement appears in this month’s statement as well.

“At this point, the current monetary policy stance, to a large part, is considered to be consistent with the projected disinflation path.”

In other words, Turkey’s Central Bank emphasizes the fact that all decisions they have taken so far were strictly aimed at stabilizing the economy and reducing inflation. There are two different ways of interpreting this statement:

  • Inflation has fallen as CBRT kept cutting rates
  • CBRT didn’t stress itself too much knowing that the basis effect will help inflation fall further, and from now, Central Bank will make its decision by taking into account the inflation rate.

Obviously the first interpretation above doesn’t seem very convincing. And it should not be either because we know all the factors that cause high inflation. We are also aware of the fact that inflation is among the main reasons lying behind interest rates. That’s why, I think, CBRT would shape its decisions based on inflation rate movements. But, is this what the CBRT is doing now?

If you ask me, Central Bank is walking on a thin line between stopping acting rationally and preserving its rational stance. Yesterday, Murat Sağman said, “We are about to exit from economics” on TV100, referencing to my latest book “Exit from Economics”. What he meant was that we are on the threshold of passing over the rationalism while crossing over to the other side.

“Central Bank better start aiming for financial stability…”

The current circumstances have brought us to the upper limit of rate cuts. But, CBRT expects year-end inflation to reach 8.2%, according to which I had predicted a minimum 25 basis points and a maximum 50 basis points cut.

However, their latest decision may cause deposit interest rates to fall to a threshold of 7.5-8.5%. As a result, those who were “unofficially” collecting negative real yields a month ago might start collecting “official” negative real yields. I mean some people might even be able to collect negative real yields from public institutions according to inflation expectations.

The way things are going; Turkish economy might have to face some unwanted side effects of wrong fiscal policies. Interestingly, the interest rates of 3 years ago are back in fashion. As you may remember, during that period, people used to borrow loans they didn’t need just put more money in their savings account. Then, what they dreaded has come true. They were struck by a sharp rise in exchange rates.

I would like to once again repeat that negative real interest rate is not good for the economy and I hope CBRT will act as reasonably as possible in the upcoming months.

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