Daily Times

Last week, the Central Bank of the Republic of Turkey lowered current policy rates from 24 per cent to 19.75 per cent. This decision slightly raised the dollar. We can consider it a limited response. If we expect inflation to fall further with the end-year expectations, we can see an interest rate cut of 900 basis points in total at the end of the year. What is important here is not the short-term response of the market, but the long-term response and how will it reflect on the prices.

We should seise the global circumstances and their effects on Turkey’s economy on a national basis.

First, inflation in June stood at 15.72 per cent in Turkey. While annual inflation in food prices is more obvious, the decline in prices of food, non-alcoholic beverages, unprocessed food and energy has a positive impact on consumer price inflation lowered in Turkey.

While these items were seen as the main determinants of the slowdown in consumer inflation, these developments in domestic demand offset the depreciation of the exchange rate along with monetary tightening effects. Increases in processed food prices triggered inflation due to cost increases. Energy prices were also offset by falling fuel prices, due to developments in the exchange rate and the decline in oil prices. The rise in automobile prices in the durable goods group was offset by the fall in clothing prices. Exports of goods and services increased due to the developments in competitiveness. Growth composition positively affects the external balance. Due to the slowdown in domestic demand, firms’ tendency towards foreign markets and the flexibility of market diversification support goods exports; lagged exchange rate effects and loans and the moderate course of economic activity limit import demand. With the strong course of tourism, improvements in the external balance continue rapidly. Accordingly, the improvement in the current account balance is expected to continue.

Employment data is not so strong.

When we look at the sectoral composition, industrial employment increased while construction and service employment decreased. Net exports would continue contributing to growth in the upcoming period. With the downward trend in inflation and partial recovery in financial conditions, the gradual recovery in the economy is expected to continue.

Under this outlook, aggregate demand conditions are expected to continue their downward contribution to inflation. Central Bank of the Republic of Turkey made a move based on this economic outlook: interest discount. The market as a first reaction in the dollar/TL side fell from 5.78 to 5.74. Now it’s in the 5.55s.

There is a tendency to cut interest rates all over the world. This is offered as a solution to the above economic outlook for Turkey. We see this mostly in the FED. What we expect from the FED’s meeting this month is the cut in interest rate. So, 25 points interest rate cut was done. In the US, the FED’s second-quarter GDP data, which was announced on Friday, rose by 2.1 per cent year-on-year, but the FED will cut interest rates, as leading data signals a slowdown in manufacturing and economic activity, and inflation is still low.

The ECD will probably make the same move in September. The important point here is that while large corporations announce the world data, global growth will not go very high. Are cuts in the interest rate the solution to the slowdown in global growth?

Economically, the IMF allocates to many countries, especially the developing countries, including Russia.

Therefore, we expect a global growth retreat in such countries.

From this point of view, we see that two things come to the fore in the monetary policy decision issued by the Turkey Central Bank. Emphasis is placed on exports and economic conditions are gradually improving. Especially tourism remains one of the most powerful items. Having said that, especially in July, capacity utilisation and real sector confidence index are downward as compared to June.

Capacity utilisation rate was 77.1 per cent in June and decreased to 76.2 per cent in July. Real sector confidence index decreased from 102.5 in June to 98.3 in July. For the sectoral confidence indices, the services sector decreased by 2.2 per cent in July compared to the previous month. Meanwhile, the retail sector decreased by three per cent, while the confidence index in the construction sector increased by 3.8 per cent. Loan interest rates were 1.30 per cent in March and 1.78 per cent in July, compared to 2.30 per cent in January. Figure 1 supports this extension:

Turkey Statistic Institution – TUIK

Turkey is expected to take place this year with the growth of -1 to +1 range. Therefore, the contribution to inflation, which might come from the demand side, is almost zero. This seems to have been taken into consideration. When we look at the costs, the price increases that might come from the costs are very dependent on the exchange rate.

When the exchange rate reaches the level of 6.20, all price adjustments will be made according to the exchange rate level.

Therefore, we anticipate the cost response may be limited.

The main goal is to stimulate economic activity. But the acceleration of Turkey’s economic activity during this period might not be directly proportional to the easing of credit transfer mechanisms. We are experiencing a different process. Basic elements that could lead to the revival of the economy.

The dissolution of credit transfer is the start of Turkey’s growth. But the process we are going through is a cycle that continues with the debts of the real sector and the process of structuring these debts. When we reopen the credit mechanism, firms will revive with the new loans and the market will become alive again. On the other hand, you may return to us as repayment of loans that have been structured in the past and expected debts this year. So, it is not correct to see the problem as interest only. Inflation was already in a downward trend.

In general, cuts in interest rates are significant.

It is foreseen that it will be further reduced by the end of the year. Does the question bring vitality to the economy? The main task of the Central Bank is to ensure price stability. So, Inflation.

This is his total duty.

Other economic adjustments are made within the framework of this task. Disinflation, high inflation or inflation is a very volatile problem. The important thing is to go with a stable figure. Financial stability. Let interests fall; credit revives; companies survive.

But this is not something that can only be solved by the move of the Central Bank.

There are three main problems with financial stability: First is dollarisation. The public borrows foreign currency.

Secondly, 55 per cent of citizens’ deposits is denominated in foreign currency, which is dollarisation. Thirdly, one of the two liras of the commercial loan debts is of companies’ foreign currency.

In other words, households, public sector and the real sector have all been dollarised

Secondly, inflation in Turkey is very high. Citizens feel high. The headline inflation is high. In standard, Turkey is not buying these places around here in the last 15-20 years. The third problem relates to financial stability in Turkey; the indebtedness of the company.

Ten years ago, 25 per cent of the national income ratio of indebtedness of all companies was in Turkey. Now, it stands at 75 per cent. Which of these problems can be solved by lowering interest rates? However, by managing expectations as a credit institution, it can assist in providing price stability here. The decline in interest rates will be well received by the real sector. It is wrong to think that interest rates will fall with interest rate cuts. Interest rates have started falling seriously for several months. In private banks, housing loan interest rates up to 1.45, commercial loan rates up to 23-24s, deposits even less. This is about the moves of the central bank. Now it will decrease further, but Not the National Bank cut interest rates, but because inflation has fallen.

Global and national risks and opportunities in the economy are intertwined and should be well managed. Turkey had faced the sanctions that are Eastern Mediterranean and Iranian tension, National Elections, dismissal of the central bank president, relations with the US in the G-20, S-400 issue. On the other hand China-US talks on the global market recovery in global trade, this also increases the foreign capital entering Turkey. Interest rate cuts should come as a level of intimidation. It is not possible to see the effects of the interest rate cut in a short time. This has already entered into prices. Now with declining deposit rates, will the consumer be directed to buying housing or foreign exchange? Here comes the element of trust. If people start to trust in the future, then they put their cash into economic activity. The element of trust and transparency we need. Besides being hopeful and hardworking. Turkey’s economy USD/TL parity would not be considered. The answer to the question of how the economy goes is not the only exchange rate.

The writer is a freelancer