What Will the Central Bank (Not Be Able To) Do?

What Will the Central Bank (Not Be Able To) Do?


There are several scenarios regarding a possible rate hike by the CBRT:


According to some, the Central Bank will push rates up to 24%. I do not know exactly how they came up with this level, but I do not think that an increase almost three times higher than the current level would be possible.


Some say that the CBRT will increase interest rates to 20%, without any gradual steps, which also means a hike of more than 1000 bps and I doubt that it would be possible neither. Based on what the sources close to Ankara say, “A policy rate between 13.5% and 18% looks like a likely possibility. Any rate higher than this seems undarable”.


Even Moody’s has not yet announced Turkey’s next credit rating, showing that they were waiting for the CBRT’s decision on 22 June. If it turns out to be a lower-than-expected hike, the credit rating will quite probably be downgraded. Given current circumstances, a sharp policy rate increase will jeopardize economic growth and will not guarantee a lower inflation.


“We Expect A Proper Press Statement.”


So, like walking on a double-edged sword, the CBRT will have to take some risk, no matter what decision it might make. In case of a slight increase, the country’s credit rating will go down, in case of a sharp increase, it will endanger growth and anger the government before the next early elections. If they asked me “What do you think we should decide?”, I would tell them that the correct course of action would be to give confidence to the markets by increasing the interest rates by 500 basis points initially, hence risk a credit rating downgrade, and continue to increase it gradually if necessary”.


And I would also advise them to release a press statement that is authored in a clear and easily understandable language, instead of a stereotypical one translated verbatim from a foreign language. I think taking moderate but clear steps instead of making bold decisions, considering the state of our foreign currency reserves and budget deficit, would be the most reasonable action to take.