What Will the Central Bank Do?

What Will the Central Bank Do?

 

Let’s remember what happened after the elections:

 

– Policy rates have been increased to 15%

– Minimum wage has been increased

– VAT rates and some other cuts have been increased

– Deposit and loan rates have been raised

– Civil servant pay and retiree pension have been increased

– Fuel prices and SCT rates have been increased

– Deposit interest rates have been decreased slightly

– Loan interest rates have been rising since.

 

Quite confusing indeed. All these decisions make me wonder what our economy officials are trying to achieve exactly?” And only one thing comes to my mind: “Apparently, reducing inflation is not their priority. They in fact want further growth and more tax revenue.”

 

I was chatting with a friend of mine who keeps close track of the markets and he said, “The Central Bank will probably set the policy rate as 23% or 25%”. When I asked “why”, he told me that they would do it to fight against inflation. Evidently, there are still expectations that CBRT will return to rational policies. In terms of income distribution and income level, the Government had no expansionary fiscal policy created in favour of the citizens, especially concerning VAT and Special Consumption Tax. In other words, the Government was not saying to the citizens, “We have been collecting less tax revenue than it ought to, now we will get more”.

 

“Political Pressure Hangs Over Our Economic Recovery.”

 

The rise in fuel prices shows us that the Government regards tax revenue collection as its top priority. As I have explored in my previous articles, the fiscal bureaucracy in Turkey has been using taxes as a means to finance government spending, not as a contributory element to further economic growth. And Minister Şimşek continues to be the guardian of this detrimental policy.

 

If both tax rates and interest rates continue to go up, they will not only cause inflation to rise further up, but they will also put growth in jeopardy. Based on my observations on the last five decades in Turkey’s economic history, I could say that people who are to be dismissed soon are usually the ones who are asked to implement the sloppy policies of those in power. Are our economic leaders aware of this? I think they are. That’s why they will ensure a moderate rise in policy rate after the recent tax hikes and price increases. Because the moment they increase the policy rate any higher than ‘required’, they might risk getting the push.

 

So, I expect that the CBRT will increase interest rates not higher than 20% at their next meeting this week.

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