September 22, 2022
The Central Bank of the Republic of Turkey (CBRT) cut the policy rate by 100 basis points to 12 percent after the Monetary Policy Committee meeting held today.
In the statement made by the Board, the emphasis on growth and employment gains were shared with the following statements:
“Strong growth has been observed in the first half of 2022. Since the beginning of July, leading indicators point to a slowdown in growth due to the weakening foreign demand.
“However, leading indicators for the third quarter point out that the deceleration in economic activity continues due to the decreasing foreign demand.
“In a period when uncertainties regarding global growth and geopolitical risks increase, it is important that financial conditions are supportive in terms of maintaining the acceleration in industrial production and the increasing trend in employment.”
Before the CBRT’s decision, the dollar/TL rate exceeded its historical peak in December 2021 and exceeded the 18.40 level during the day.
Most of the respondents to the Reuters poll expected the CBRT to keep interest rates steady.
11 of the 14 economists surveyed predict that the CBRT will not change the interest rates, one by 50 basis points; two predicted a 100 basis point cut.
According to Reuters, senior economist Liam Peach from London-based independent economic research company Capital Economics says that the CBRT may cut interest rates this month to pave the way for growth, and reminds that industrial production fell on a monthly basis in July.
The average expectation of 17 institutions participating in the survey conducted by the Bloomberg HT Research Unit was that the interest rate would be reduced by 50 basis points to 12.50 percent.
Accordingly, while 9 institutions were waiting for a cut in interest rates, 8 of them announced an expectation of 100 basis points and one 50 basis points.
The Central Bank cut the policy rate by 100 basis points to 13 percent last month.
Thus, the CBRT changed the policy rate, which it kept at 14 percent in 2022, for the second time.
How did economists interpret the decision?
Economists and economics writers evaluated the CBRT’s easing step together with the TL rate, which has already fallen to a record low against the dollar.
Economist Mahfi Eğilmez said on Twitter about the decision, “In the country where inflation continues to increase, the central bank cuts interest rates and some commentators say let’s look at the reason. Will you laugh or cry?” made his comment.
Economist Tuğba Özay, in her comment on Twitter, said, “The only change in the text is that the slowdown in growth has started with the effect of weakening foreign demand” and added:
“In an environment where the possibilities of a global recession increase, it is inevitable that foreign demand will slow down. As a result, foreign demand will continue to weaken no matter how low the interest rates.”
Economist Atilla Yeşilada commented, “The CBRT is now ‘out of the way’. A further 100 basis point rate cut means I live on Mars, not on Earth.”
The Economist and Yeniçağ newspaper columnist, Evren Devrim Zelyut, commented on the decision on Twitter:
“The AKP’s tactics: Look how we lowered the interest rate, vote for us in the election, let’s reduce inflation like this…
“Would anyone be fooled by this tactic and voted? By using the CBRT, the AKP blew up the rate of inflation and inflation just for a rhetoric that it would use in the elections, but everyone, have a good day!”
“The cost of such a free monetary policy management is high”
Foreign economists speaking to Reuters also evaluated the decision.
SEB Strategist Per Hammarlund said:
“They took the decision to lower the interest rate to support economic growth. It means that at this point, they care more about growth than inflation.
“But they will have to find a way to support the Turkish Lira without completely depleting the reserves. I expect an explanation or intervention in this direction in the coming months. Inflation may rise again, which may lower the value of the Turkish Lira again.”
Alison Shimada, Head of Emerging Markets, Global Investment at Allspring, said, “It is very difficult to chase investment opportunities in a market where economic policies are so irrational.”
“It’s possible for markets to recover if a proper government (economic policy) comes to power. We’ve seen this before in countries like India and Indonesia. But the decision maker has to be right. It’s illogical to cut interest rates when inflation is at 80 percent.”
Swissquote Bank Analyst İpek Özkardeşkaya said, “Under normal circumstances, the interest rate should increase in response to high inflation. Every reduction takes the interest rate away from the value it should be and reflects on the exchange rates.”
“The cost of such free monetary policy management is high and it is absolutely unsustainable.”
Liam Peach, Senior Emerging Markets Economist at Capital Economics, said:
“There is a negative real interest rate problem, the current account deficit is growing and short-term foreign debts are still high. Foreign investors’ desire to invest in Turkey may decrease and there may be more pressure on the Turkish Lira. The value of the dollar will exceed 24 TL at the end of the year. We look forward to it.”
How did the politicians interpret the interest rate decision?
DEVA Party’s Economic Policy Presidency interpreted the Central Bank’s interest rate cut decision as a disconnection from the world and shared the following comment on Twitter:
“The Central Bank has once again shown that it is disconnected from the world and does not care about the fight against inflation.
He continued to support the government’s policies of unfair transfer of wealth to the wealthy and oppression of the low-income.
“Citizens will of course have the last word against this oppression at the ballot box.”
CHP Spokesperson Faik Öztrak, on the other hand, said in his Twitter message, “With this decision, both the cost of Currency Protected Deposits to the Treasury and the amount of foreign currency sold through the back door of the CBRT to rein in the exchange rate will increase even more. Keep spitting into the wind…”