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‘Look, we lowered the interest rate, inflation fell’

‘Look, we lowered the interest rate, inflation fell’
‘Look, we lowered the interest rate, inflation fell’

Why did the Central Bank cut interest rates yesterday? One reason is that the economy is slowing down. “Leading data” Indicators such as the manufacturing industry purchasing managers index (PMI), the real sector confidence index, and the export climate pointed to a slowdown in the summer months. Housing sales, which broke records in the first six months, also started to decline.

The election is ahead of us, there is very little time left before the ballot box arrives in front of Turkey. No government wants to go to elections with a slowing economy. A party whose votes fall from 50 percent to less than 30 percent does not want it at all.

Moreover, it is the AKP’s algorithm to revive the economy with hormones before the election. To please the tradesmen by reviving commercial life with interest rate cuts and, more importantly, credit packages… To reduce the discontent of the employees with a terrible increase in the minimum wage… The AKP has always done this before the last elections.

Before the Presidential Referendum in 2017, a huge loan package was opened by the state institution Credit Guarantee Fund (KGF). Before the local elections in 2019, the policy rate was lowered. I think it is certain that a new KGF package will be opened this time as well. As a matter of fact, former Ziraat Bank Deputy General Manager Senol Babuscu He wrote that a 500 billion lira KGF-guaranteed loan package has been prepared. We will also see that public banks reduce housing loan interest rates. In this context, the Central Bank is trying to support the plan to revive the economy with interest rate cuts before the election.

“The Central Bank’s interest rate cuts are meaningless. Loan interest rates are much higher in banks!” There will be those who will say. It is true, but we will see that decisions will be taken in the coming period that will force banks to give loans at low interest rates. As a matter of fact, the commercial loan interest has already been limited to 29 percent. With a decision taken yesterday, ceiling rates were imposed on commercial loan allocation and renewal and loan disbursement fees.

In short, the Central Bank’s interest rate decision yesterday is part of the ruling party’s desperate efforts to revive the economy before the election. I say desperately because the problem of the Turkish economy today is inflation, not slowdown! AKP’s votes fell below 30 percent, not because the economy is not growing enough, but because inflation has risen above 80 percent (the actual rate is much higher than this). Neither the new KGF packages nor the Central Bank’s interest rate cuts can cure inflation. On the contrary, they will reduce inflation even more.

But the President Erdogan does not agree with us. According to that “Interest cause, inflation result.” He believes that in order to reduce inflation, it is necessary to lower interest rates first. Now he has an opportunity to prove his theory. Because in the next December and January, inflation will decrease due to the base effect.

Last December and January, inflation was very high due to the terrible rise in the dollar. Monthly inflation was 13.5 percent in December and 11.1 percent in January. Currently, inflation is increasing by 3-4% on a monthly basis. Again very high but not as high as last December and January. Annual inflation will appear to have decreased in December and January as it is calculated based on the same month last year. (However, price increases will not stop.) This, the decrease in inflation due to the base effect, is to the President, “Look, did you see, we lowered the interest rate, the inflation went down” will give you the opportunity to say. Thus, he will try to show that he has the will and power to solve the problems in the economy, even if they are not resolved.

As I just said, the policy rate was lowered in 2019 as well. They replaced the President of the Central Bank, who did not do what they said, in order to make the fall in inflation look like the result of interest rate cuts. Murat Çetinkaya, who opposes the interest rate cuts, is gone, and the new President is replaced. Murat Uysal cut the policy rate at a record pace. Meanwhile, when inflation started to slow down (as I said, this would have happened anyway) “Look, we lowered the interest rate, inflation fell” they said.

They will do the same again. But this time there will be very few believers.

The article is in Turkish

Tags: lowered interest rate inflation fell

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