An­other in­ter­est rate bat­tle loom­ing?

Dünya Executive - - COMMENTARY - Alaat­tin AKTAS Econ­o­mist

The Cen­tral Bank gov­er­nor, Mu­rat Uysal, said in his speech at the Ankara Cham­ber of In­dus­try last week that the rate cuts in July and Septem­ber were front-loaded and high-rate. This was in­ter­preted as sug­gest­ing fol­low­ing cuts would be more cau­tious.

If we take th­ese com­ments at face value, it means that the Mon­e­tary Pol­icy Com­mit­tee of the Cen­tral Bank will not lower the in­ter­est rate by more than one to two points at the Oc­to­ber 24 meet­ing. Is this pos­si­ble? Or let’s ask the ques­tion this way: Does the Cen­tral Bank have the fi­nal word on in­ter­est rate de­ci­sions?

If the Cen­tral Bank acts with the idea that a mod­er­ate in­ter­est rate cut should be the next step, the con­flict with the Palace will be ex­ac­er­bated again. In fact, it may not be cor­rect to call this a con­flict. The Cen­tral Bank, which sym­bol­ized by the Ankara-Ulus dy­namic for the time be­ing be­cause it has not be moved to Is­tan­bul yet, does not have the power to op­pose Pres­i­dent Er­do­gan’s will on in­ter­est. Let’s not for­get, the pre­vi­ous Cen­tral Bank gov­er­nor, Mu­rat Cetinkaya, was dis­missed on the grounds that the in­ter­est rate was not re­duced. More­over, Turkey was dragged into an ex­change rate shock last year be­cause the Cen­tral Bank, headed by Cetinkaya, could not raise the rates even sym­bol­i­cally, lead­ing to an ex­ces­sive in­crease later. How­ever, his ser­vices at that time were quickly for­got­ten and Çetinkaya was dis­missed on the grounds that he re­sisted the in­ter­est rate cut this year.

So, do you think that the Cen­tral Bank will de­cide in­de­pen­dently on the in­ter­est rate cut on Oc­to­ber 24? We have short mem­o­ries, so let’s re­mem­ber: In a July 10 speech, Pres­i­dent Er­do­gan’s speech said, “We can­not ac­cept the ap­proach of crit­ics on the change of duty we made in the Cen­tral Bank gov­er­nor­ship. For them, the gavel is in one hand, the sound block in the other. Who will pay the price? Pol­i­tics will. Who will be happy about it? The one at the Bank [the Gov­er­nor]. We can­not let this hap­pen. You will fol­low any de­ci­sion made. In the new man­age­ment sys­tem, the Pres­i­dent has the au­thor­ity to in­ter­vene in th­ese mat­ters. Thus, we took such a step to change our friend who does not fol­low the in­struc­tions given on this sub­ject, which is the mother of all kinds of evil called in­ter­est.”

Does the econ­omy re­quire this in­ter­est?

The gap be­tween the Cen­tral Bank in­ter­est rate and an­nual CPI in­crease was widened in June. The dif­fer­ence reached 8.28. And the Cen­tral Bank’s gov­er­nor­ship change was car­ried out in July. There was a dif­fer­ence of 4.74 points be­tween the in­ter­est rate and the CPI change at the end of Au­gust. If the CPI goes down to 9.80 per­cent, the dif­fer­ence in Septem­ber will be 6.70, which will be the sec­ond big­gest gap in 2019. There­fore, the ques­tion is whether Er­do­gan will al­low such a gap or not.

How­ever, the 6.70 point dif­fer­ence may oc­cur as of the end of Septem­ber and this gap will close slightly with the in­ter­est rate cut at the Oc­to­ber 24 meet­ing. If in­ter­est rate is de­creased by one to two points, the in­ter­est rate-CPI dif­fer­ence will re­main around 5 to 6 points. We do not think that the dif­fer­ence can be kept at this level. While the prece­dent of chang­ing the gov­er­nor­ship hangs like De­mo­cles’ sword, no one at the Cen­tral Bank can make an in­ter­est rate de­ci­sion on the grounds that “the econ­omy re­quires it.”

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