With this inflation, interest rates won’t (musn’t) fall!

Although it remain below the monthly expectations, we are still facing a 19,5% annual inflation rate according to April 2019 inflation statistics. In April, food inflation has hit record highs as well.

We will never achieve the intended inflation rate unless food prices are significantly improved. If this trend goes on, CBRT may have to revise its anticipated inflation rate in the second half of the year.

Inflation, which normally shows a moderate trend in summer, may start going up due to food high food prices. As inflation also affects the interest rates, cost of funding will continue to remain high if we don’t soon face a boosting development. This is obviously not good news, especially for banks that float their previous period loans tied to overnight rate.

“Let’s take our time to do the right thing…”

Actually, it’s not very smart to start early celebrations just because inflation rate fell from 19.70% to 19.50%. Actors who always monitor the markets very closely should better be careful. It is my humble suggestion to some banking economists to go over their “CBRT will cut rates by at least 400 bps this year” expectation that they had released before the last Monetary Policy Committee meeting.

If CBRT cuts rate without achieving a stable decline in inflation, this might bring a considerable negative impact on exchange rates as well as inflation, causing inflation expectations to get revised negatively.

As the saying goes, ‘one swallow does not make a summer’. I haven’t seen any swallows yet.

By the way, I think I won’t be making any comments on the FITCH decision in this report since there’s not too much to talk about it.

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