The CBRT announced that it made the interest rate cut in order to compensate for the loss of momentum in economic activity and to support employment and industrial production. With the definition of “sufficient” for the interest rate, the bank also gave the message that the policy rate will be kept constant in the upcoming period, and that this is not the beginning of a reduction cycle.
Former Undersecretary of Treasury and Economist Dr. Mahfi Egilmez, on his personal blog In the analysis he published, he evaluated the CBRT’s decision to cut interest rates yesterday. After the Central Bank cut the interest rate by 100 basis points to 13 percent, Eğilmez wrote an analysis in his personal blog “Writings to Myself” and said:
“While inflation continued to rise, the Central Bank (CBRT) reduced the interest rate from 14 percent to 13 percent. In the Decision of the Central Bank Monetary Policy Committee Let’s examine the expressions in (PPK) (the ones written in italics are the expressions in the PPK Decision):
‘Leading indicators for the third quarter point to some slowdown in economic activity.’
Indeed, there are signs of a decline in growth in the third quarter. If it continues like this, the decline will become much more pronounced in the fourth quarter, and things will get complicated if growth approaches zero and stagflation occurs in such high inflation. Therefore, this determination of the CBRT is correct.
It is important that financial conditions are supportive in terms of sustaining the acceleration in industrial production and the increasing trend in employment at a time when uncertainties regarding global growth and geopolitical risks increase. In this framework, the Board decided to decrease the policy rate by 100 basis points and evaluated that the updated policy rate is sufficient under the current outlook.’
Here, the MPC mentions that it is understood that the uncertainty and risk increase created by various external factors will adversely affect industrial production and employment, and that it is necessary to support financial conditions in order to reverse the negativity. As a result of this approach, it was aimed to revive the economy by reducing the policy rate by 100 basis points. Article 4 of the CBRT’s founding law includes the following provision: ‘The main purpose of the bank is to ensure price stability. The bank directly determines the monetary policy it will implement and the monetary policy tools it will use to ensure price stability. The Bank supports the growth and employment policies of the Government, provided that it does not conflict with the aim of achieving price stability.’ The main monetary policy tool used to ensure price stability is interest. If price stability has deteriorated in an inflationary direction, the CBRT has to increase the policy rate. Today, it is a fact that Turkey is in a very high inflation phenomenon and inflation is on the rise. In this case, lowering the interest rate contradicts the statement ‘supports the government’s growth and employment policies, provided that it does not conflict with the aim of ensuring price stability’. Because the interest rate cut is a step inconsistent with price stability.
“The CBRT will resolutely continue to use all the tools at its disposal within the framework of the liraization strategy until strong indicators pointing to a permanent decline in inflation emerge and the medium-term 5 percent target is achieved in line with its main objective of price stability.”
A central bank should first of all focus on ensuring and protecting the reputation of the money it prints. The state should protect its own money so that citizens can use that money as a measure, as a means of saving and as a means of shopping. Today, the tolls of many infrastructures are indexed to the dollar. Since the end of last year, deposits have also been indexed to foreign currency. Today, the practice called exchange-protected deposits is nothing but the indexation of deposits to foreign currencies. A state that indexes its own money to the currencies of other countries loses its right to require its citizens to transact in national currency.
Now let’s come to the consequences of the interest rate cut:
After this decision, TL suffered external depreciation. The USD/TL rate rose from 17.96 to 18.10 (there are higher and lower points in between, but this is the latest situation.) This is a development that will increase costs, prices and inflation in Turkey, which has import-based production.
Banks (CBRT policy rate + 3 points =) paid interest up to 17 percent to those who switched to currency-protected deposits, and the treasury was paying the exchange rate difference from the budget. After the Central Bank reduced the interest rate from 14 percent to 13 percent, the interest rate (13 + 3 =) to be paid by banks for currency protected deposits decreased to 16 percent. In this case, the additional interest burden to be paid by the Treasury also increases. A similar situation applies to the payments to be made by the CBRT to those who open a currency-protected deposit account by changing their foreign currency deposit account. Therefore, reducing the interest rate brought additional payment burden to the Treasury and the CBRT. Since the currency protected deposit was not on the agenda while the budget was being prepared and approved, and no appropriation was included in the budget for this purpose, an additional budget law was enacted in the middle of the year. With this regulation, an appropriation of 40 billion TL was included in the budget for currency-protected deposit expenses. However, since the amount paid from the budget in this framework from the beginning of the year to the end of July reaches 60.6 billion TL and this interest reduction brings an additional burden, it means that at least three times the budget appropriation will be spent until the end of the year. On the other hand, it is estimated that the amount of the payments made by the CBRT from the beginning of the year to the end of July to those who opened foreign exchange-protected deposit accounts by returning from their foreign exchange deposit accounts amounted to TL 80 billion. These payments cause loss for the CBRT and the bank covers this by printing money.
We know that one of the causes of inflation is spending increases. In this case, public expenditures will be at least 120 billion TL more than the exchange-protected deposit payment this year, which means that inflation will increase. Just as the CBRT transfers its profits to the Treasury, its losses must be covered by the Treasury. In this case, the CBRT will ask the Treasury to cover its losses, let alone transfer profits to the Treasury in 2023. Therefore, there will be a contribution to inflation from this side.
It is not certain that lowering interest rates will increase growth. Because in an environment where inflation is so high, an interest rate cut means an increase in risk. The CDS premium, which had started to decline in the last few days, rose rapidly following this reduction decision. Increased risk is the most important obstacle to investments.
To sum up, Turkey seems to have completely abandoned the fight against inflation. In this context, Turkish society should get used to living with high inflation and the loss of purchasing power created by it for a long time.
.