Markets do not expect Central Bank to cut interest rates

The Turkish Central Bank will not dare, one assumes, to opt for a new interest rate reduction because of the uncertainty in the global financial environment. For this reason, market experts do not expect any interest rate changes in the Monetary Policy Committee (PPK) meeting to be held tomorrow.
 
However, Central Bank Governor Erdem Başçı, in a speech delivered last weekend, highlighted that they have especially benefited from the interest rate corridor formed within an ongoing monetary policy and liquidity management application, adding that they were considering widening the interest rate corridor during the period of uncertainty ahead. Based on this statement, there was debate on whether or not there would be a drop in the lower limit of the corridor in tomorrow’s meeting to widen the interest rate corridor. It is also a matter of discussion whether the widening that Başçı mentioned will be accomplished by a reduction in tomorrow’s meeting or whether it will be achieved by raising the upper limit of the corridor when uncertainty increases.

Separately from Başçı’s statements, if we go back to what the market experts say, serious volatility is expected in the financial segment in the upcoming term. Because of this volatility, the Central Bank will steer clear of a reduction. Market experts, including foreigners, agree that the government is continuing its insistence on interest rate cuts but in such an environment, the Central Bank will not lower interest rates because of its risks.

We have seen that in recent IMF and World Bank meetings, there has been discussion that Turkey has not been able to make use of the recent capital movements flowing into Central European countries because of the incorrect policies that it adopted. Meanwhile, in the reports of international financial agencies, it has been highlighted that capital inflows will be fluctuating but will decrease overall, meaning that Turkey may experience capital troubles in the coming period. Again, because it is very sensitive to capital movements, the Turkish economy’s fragility has increased, according to reports.

High inflation expected

Market experts say there have been serious devaluations in the Turkish Lira recently. Because of the low demand for assets in Turkey, as well as the re-acceleration of the growth in loans and high inflation rates, they think it is a low probability that the Central Bank, in this environment, will opt for a new cut in interest rates.  

Meanwhile, the expectation survey of the Central Bank has already revealed that a reduction in interest rates would be very difficult. According to the latest expectation survey, end-of-year inflation expectations in the annual consumer price index has gone up from 8.9 to 9.2 percent. While the growth expectation for 2014 has remained the same at 3.2 percent, the end-of-year current account deficits expectation regressed from $48.4 billion to $47.8 billion.

Thus, under normal circumstances, because of such a high inflation expectation, the Central Bank would be expected to raise interest rates instead of reducing them. The global uncertainty also necessitates that the Central Bank be more cautious anyway.

Despite this, it is nevertheless seen as a positive development that the Central Bank is not continuing to cut interest rates.