What Did The Central Bank Do? What Should It Do Now?

Our expectations do not often come true since we are focused on what the Central Bank should do, rather than what it should do. Although we admit that it is not politically possible for the CBRT to hike interest rates, we at least thought that they would probably not cut rates any further considering its devastating side effects. When the Central Bank officers make decisions that defy rationality, how one can foresee such irrational decisions? 

Since the effort to “increase the interest rates without appearing to have increased them” with the help of the FX rate-hedged deposit scheme did not help the credits and loans in any way, the key policy rates, which are claimed to be “insignificant”, were cut by 100 bps this time by the Central Bank. If it was made insignificant, then why was it reduced in the first place?

Some reasons include:

– To exert pressure on banks that collect funds with low funding costs but sell them with short-term repayments and high interest rates

– To decrease the interest rates that are likely to rise in the future while there is a chance

– To push down the deposit interest rates by one or more basis points

– By helping them gain astronomical profits, to create the impression that the financial markets proved impervious to economic difficulties

– To intervene in advance, seeing that the economic growth is slowing down

And many other reasons that I can’t think of now. However, none of these reasons above helps us find the Central Bank’s practices logical. Admitting that inflation has not declined and so lowering the interest rates under the pretext of “global recession risk” will not produce any helpful results, especially now when the correlation with market interest rates has been broken.

I am really curious to see what the CBRT will do to avoid the side effects of this decision. In the meanwhile, it can be observed that the markets have developed a thick skin against the Central Bank’s decisions, just as they have against the credit ratings. I think I would not be wrong in saying that we are going through a cultural metamorphosis.