Central Bank did the right thing
Although the market expectation was that there will be no change in interest rates, we should always remember that our Central Bank has the potential to surprise us. Luckily, this time, the Bank chose the right move by keeping interest rates steady.
In fact, looking at some economic developments, one could think that there might be a cautious reduction. Domestic demand and economic activity are quite low. While loan interest rates (parallel to deposit rates) increased and credit volumes started to decline again. On the other hand, the high course
of food prices, import costs and inflation expectations, which were mentioned in the statement of the previous meeting but not used in the last one, no longer occupy the agenda. We can see headline inflation approaching single digits with the base effect until October. (The only factor that will slow this trend will be public price hikes.) This also means that the TRY will become thoroughly attractive in the eyes of foreign investors with the rise of real interests. On top of that, it has become clear that the Fed’s forward move, which was not yet clear at the April 25 meeting, will be more than one interest rate cut. Although this does not necessarily mean as much money will come to developing countries as before, it will surely have some positive impact.
However, other dominant factors seem to have prevented the Central Bank from reducing interest rates this month. There is no need to re-examine the internal and external political risks among these factors. The other factor is that the public sector continues to give a high deficit when we take into consideration the guarantees it gives publicly and implicitly, not only as a budget deficit. (In fact, the new Credit Guarantee Fund package announced during the meeting is one of them). The Central Bank acts with the logic that, “If the government is trying to provide revitalization through fiscal policy, I can wait a little longer.”
If we do not encounter a problem that we did not anticipate in the next one and a half months, the Central Bank will start to cut interest rates at the next meeting. The gradual and more or less clear path of these reductions will enable the markets to recover more rapidly and accelerate the inflow of resources by domestic and foreign investors (with the incentive to enter the market earlier in the interest rate cut environment).