For a long while Turkish economy suffered high interest rates in banking system. The thesis was “if interest rates go down US dollar will go up”. In fact, it is known to many that Turkey’s President who continuously tried to impose the opposite opinion was in strong disagreement with the boss of the Central bank – who was eventually fired due to his resistance despite the President.
The new governor of the Central Bank who obviously seems to be working with the president in a much better harmony has made two rate cuts so far.
Governor Murat UYSAL reduced the key rate to 16.5% from 19.75% on Thursday, exceeding the forecasts of many experts. The Monetary Policy Committee said inflation is likely to end the year below its earlier forecasts but suggested less scope for deeper easing. The lira gained.
The result is despite the strong cuts made by the Central Bank Monetary Policy Committee (PPK) on July 25 and September 12, the Dollar / TL level has managed to remain in the 5.65-5.70 band.
Now when we look at this picture the President of Turkey seems to have proved his point which is “dollar will not inevitably go up when interest rate is cut”. At this point, we need to remind though that the Central Bank has been regulating the market via other tools as well such as making an abundancy of dollars in the market (at the expense of running out of foreign exchange reserves)
The Central Bank is expected to continue said rate cuts in order to stimulate the market and lower inflation further.
Based on above, some experts believe with the October inflation to be announced on November 4, we will see a more positive base effect of 2.67 in the same month of the previous year. It is estimated that inflation will remain in single digits in September-October with the base effect of 8.9 percent which we will see in two months total. The Monetary Policy Committee is expected to make a strong interest rate cut on 24 October following the September inflation, which will be announced on October 3 and beat the double-digit inflation.
The main positive impact of interest rate cuts, which are expected to accelerate economic activity in the third quarter, will be seen in the last quarter of the year. Citizens, who continue to be cautious and expect the improvement in inflation to reflect on interest rates, expect the banks to lower interest rates – which we have started to see happen indeed.
President Erdogan said in a recent speech "Inflation is falling, interest rates are falling. I believe as interest rates fall, inflation will fall as well. You will see it”.
