There is some confusion around the omission of the line, “Additional monetary tightening can be done when necessary,” in the Monetary Policy Committee’s last statement. Instead, the report said: “Monetary stance will be determined to keep inflation at levels consistent with the targeted path.” This change was interpreted as the Central Bank making preparations for interest rate cuts.
That does not mean that the Bank will lower rates just because it changed its wording, of course.
On the contrary it could, based on the wording, still apply higher interest rates. And it doesn’t need to make any additional decision for this. Let’s not forget its move toward the end of last month when it shifted the funding from weekly to nightly, thus effectively increasing the interest rate from 24 percent to 25.5 percent.
This change of expression makes no sense in practice. Although this amendment implies a change of intent, it also has little meaning. The Central Bank can say that it will reduce the interest rate at the next meeting if it wants. We have to look at whether it would or would not, and whether the conditions would be appropriate for it.
Can the Central Bank cut interest rates under current conditions? Let’s leave the immediate environment aside and look at what could happen on June 12, when the next Monetary Policy Committee meeting will be held.
Loan and deposit rates are rising. Everyone in Turkey is monitoring the exchange rate. It is clear what the increase in exchange rate has cost. An interest rate cut is impossible in such an environment! But there is a question that needs to be answered: Why then did the Central Bank cause such confusion by making a change in its wording?
Is the change of expression an instance of negligence or the desire to see how the markets would perceive it? If so, what we have seen is that even an indirect expression leading to the interpretation that there may be a rate cut has triggered the exchange rate. Will this indirect expression turn into a concrete step? We don’t think so.