Passing the buck
The Central Bank threw the markets a curveball last week by not raising interest rates. First of all, this decision needs to be criticized in light of the communication strategy (which does not exist) of the center. In a developed economy, a central bank does not make a zero increase while the market expects a 100-125 basis point hike. Market players do not have to make assumptions about the reasons after the decision is made, it just happened. All this aside, this situation leads to unnecessary volatility and speculation in the markets.
The decision to keep interest rates fixed underlines two points: First, it shows that economic activity is shrinking beyond the market’s estimates. Although there is a soft expression in the text of the Central Bank’s decision - “the slowing signals in domestic demand are increasing” - it seems that the situation is more serious. Emphasizing the “lagged effects of monetary policy decisions”, the message is that the contractionary effect of the increase in June should be sufficient. However, the fact that inflation will go up to 17 percent over the next few months may create a sense that the current policy rate of 17.75 percent will be insufficient. Indeed, the market has immediately responded in this direction.
The only way to overcome this perception is the second important point in the text: “The contribution of fiscal policy to the balancing process.” In this way, the Central Bank is passing the buck to the new Treasury and Finance Minister Albayrak. (However, contrary to what some might think, this is not a surprising pass, it is a prearranged move. Already, Mr. Albayrak made a statement emphasizing monetary tightening).
Monetary policy decisions are decisions that are transparent and effective. But the same thing is difficult to say for fiscal policy. It will be very difficult to implement a “convincing and effective” austerity at a time when the government is already experiencing a credibility problem for some reason (whether right or wrong), especially in an environment where a recession is expected in economic activity and local elections are to be held in 8 months!
Applying a tight fiscal policy that reduces public spending and increases national savings is a crucial factor in balancing the economy. Inter alia, to pull down the export/ redeem rate below 100 percent will also help lower interest rates by providing fresh money for the market. However, it is very difficult to reduce expenditures, which are mostly “ossified”, and to increase incomes in an environment where the economy is stagnating. In order to strengthen the credibility of the program, it would be useful to set specific target levels throughout the program period, for example for non-interest surpluses (as previously done in the IMF program), rather than just a tight budget. Obviously, Mr. Albayrak has undertaken a very difficult task at the beginning of his ministry.