Not just inflation
Keeping interest rates steady is not only about bringing down inflation
The Central Bank kept the interest rate constant, as expected. It was noted in its statement that the aim of this decision is to accelerate the decline in inflation. There is another purpose, however, that is not mentioned: To avoid another increase in the exchange rate, the one indicator about which people are most sen
sitive, especially when there are ten days left before the election.
The Central Bank Monetary Policy Committee did not change interest rates. The policy rate - the one-week repo auction rate - was kept at 24 percent.
The overnight lending rates and late liquidity window interest rates remained constant at 25.5 and 27 percent due to the weekly interest rate. These rates, especially overnight interest, are important because the Central Bank can raise the interest rate to 25.5 percent at any time by shifting market funding from the weekly repo to overnight without the need for a new decision on interest, as it did in the last week of March into April. The same procedure was applied in May, too.
Until last week, the inflation risk was always a key feature of Monetary Policy Committee statements. But now things have changed. Although the presence of risks in pricing behavior are accepted, the tone of the discourse has changed. Last week’s statement included the following:
“Domestic demand developments and the effects of monetary tightening support the decline in inflation. However, the Committee has decided to maintain a tight monetary stance in order to limit the risks related to pricing behavior and accelerate the decline in inflation.”
The implicit purpose
With the annual CPI increase now below 19 percent, and expectations that it will drop to 15-16 percent by the end of June, can the Central Bank’s decision to keep the policy rate at 24 percent be explained by the goal to support the decline in inflation? Is the annual inflation decline the result of the Central Bank’s high rate of interest? Or let’s put it another way: If the Bank had cut the rate by half or one point at last week’s meeting, what would have happened?
Without a doubt, the economic indicator the Turkish people are most sensitive about is the exchange rate, followed by gold and then the interest rate. The interest of the Central Bank does not directly concern the citizen at all. But if the Central Bank had cut interest rates, the exchange rate would surely have escalated.