Another interest rate battle looming?
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.”