A step closer to single-digit interest rates
It was a second step towards single digits with Central Bank’s Monetary Policy Committee interest rate cut from 19.75 percent to 16.50 percent. The first step was taken on July 25. Of course, the single digit is not our expectation or forecast. President Erdogan had recently pointed to a single-digit level in interest rates. On July 25, the interest rate was trimmed from 24 percent to 19.75 percent, a 4.25 point reduction. As we just mentioned, the committee cut rates again by 3.25 points down to 16.50 in last week’s meeting. In other words, there was a reduction of 7.50 points within less than two months.
It was no surprise
It was pretty clear how much the Central Bank would cut rates in last week’s meeting. 3.25 points was no surprise. As we said a couple of times earlier, the Committee’s meeting on October 24th and the decision coming out from that meeting is critical. It is worth emphasizing some of the facts one more time:
►Has President Erdogan once again stated that he is allergic to high interest rates? Yes. And did he say: “We will reduce the interest rates down to single digits” once again? Yes.
►The course of annual CPI is out there. If the price increase in September is lower than 1.66 percent, will the annual rate go down to single digits at the end of September? it will…
►Is there an increase in foreign exchange rates when rates are cut - no matter how it increases? There is.
Now put yourself in place of the members of the Monetary Policy Committee: A series of preliminary preparations have been made for the October 24 meeting and you have gathered to make decisions. You look at the annual CPI, probably a single digit. The politicians have already decided on your behalf, demanding a single digit for interest rates.
It can be very shocking to go below 10 percent at once from 16.50 percent; a better decision is to set a rate around 10-11 percent. Who knows, maybe you take a leap of faith and cut it down to 9.75. The difference is just 0.25 points but the meaning differs a lot when it is 10 or 9.75 percent.
Should rates be single digit?
Now, if the Central Bank takes such a step in order to relieve the pressure from politicians and to say: “Look how interest and inflation fell to a single digit,” it may have to increase the interest at the December meeting. But if there is no extraordinary set of developments by October 24th, we could see interest swiftly lowered to single digits.
So if the Central Banks takes such a step, because it can’t resist political pressure, it may have to raise the foreign interest rates in December meeting. But we may witness single digit rates on October 24th - which doesn’t seem possible right now - if there are some extraordinary developments.