Central Bank’s rate decision as important as new cabinet

Central Bank’s rate decision as important as new cabinet

The markets are keeping a close eye on cabinet members to be named on July 9. Analysts argue that naming the cabinet and the economic management team would not do the job, but equally important is the decision the Central Bank is set to make at its July 24 monetary policy committee meeting.

Amid the latest inflation data, the Central Bank is widely expected to deliver an interest rate hike. Foreign banks and local brokerage houses argue that interest rates must be hiked by “at least one point.” Yet, it is yet to be seen whether rate hikes will continue and rate hikes alone would be enough to keep foreign investors’ interest in Turkey alive.

Bankers also note that the appointments to the economic management teams and to the boards are important, but they stress that the first decision the Central Bank will announce under the new presidential government system is significant. One banker said the people who will be appointed to oversee the economy may provide some hints regarding the Central Bank policies. The banker added that the Central Bank must lift the interest rates but whether or not the expected rate hike would be considered satisfying depends on the appointments.

Another banker said the government decisions and policies implemented under the new system are important, adding that “everybody agrees that the economy has to slow down but we need to see a road map regarding the slow down.”

The same banker noted the steep rate hikes and said that excessive rate hikes will lead to a sharp slowdown which in return will cause serious problems in the real sector, and it is important how the news management will handle this process. The banker stressed that the new period will be much more difficult than the current environment and should be managed properly. “The economy needs to slow down but should not derail and it will be difficult to do this,” the banker said, adding that the economic management team and its practices will be important to ensure this.

Markets ready to trust

I asked the bankers about their predictions regarding the appointments to the economic management team and to the cabinet. Noting that several names have been in circulation as potential candidates, the bankers said they do not expect people, who will not be welcomed by the markets, to be appointed to the posts. According to the bankers, if Deputy Prime Minister Mehmet Şimşek and Finance Minister Naci Ağbal keep their posts nothing will change. In other words, unless people known for their unfavorable views about interest rates and the market economy are selected, the appointments should not cause any worries, they said.

One banker noted that the markets are ready to trust the new economic management team and the markets are likely to positively price in the new management unless it includes some very unfavorable names. Foreigners are also positive about the new management, the banker added.

The same banker suggested that the new administration needs to create positive expectations regarding the way the economy is managed and said that this will be much easier if the Central Bank announces some confidence-building measures along with its interest rate decision at the rate-setting meeting.

If all those are done in the short-time, meaning within one to two months, a positive environment could be created, but it is crucial for the authorities to put forth more serious measures, a rational road map for the economy, and measures designed to help the economy slow down in a controlled manner without disturbing the balances in the medium-term.

To summarize, it is clear what should be done in the short-time to provide some relief to the market, but the management of the economy in the medium-term will be more a more difficult task.

Erdal Sağlam, Turkish Central Bank, Naci Ağbal, Mehmet Şimşek