Growth is slowing down even in the absence of an interest rate hike

Growth is slowing down even in the absence of an interest rate hike

Foreign trade inputs made public Aug. 29 showed the deficit had narrowed in July.

Looking at the details of import numbers one can see the slowdown in growth and a negative picture in terms of production and domestic consumption.

It is probable this will also have a negative impact on tax incomes.

On the other hand, the rise in the value of foreign currency that started after the bayram holidays continued as well.

Although the United States dollar gained value globally as of Aug. 29, almost everyone was of the view that the dollar trend in Turkey was independent of the global environment and the upward trend in foreign currency was continuing.

That is why the expectation for the Central Bank to increase interest rates is on the rise.

There is conviction that the increase in the value of the foreign currencies is related to domestic decisions that keep being delayed as well as negative developments in international relations. Looking from a technical point of view, one can observe the widening gap between interest rates in the markets and those of the Central Bank.

That is why almost everyone in the markets are of the view that the Central Bank should definitely increase interest rates.

Just as we have previously witnessed, because interest rates were not increased on time, the expectations on the necessary ratio for interest rate hikes is also getting higher and higher. Some argue the Central Bank should have a minimum 2.5-3 points interest rate hike while there are others arguing that a hike below 5 percent will not calm the markets.

Meanwhile, foreign trade inputs have proven the government’s argument wrong that once interest rates increase, growth rates will drop.

The drop in imports in July following June and the fact this has taken place despite increasing oil prices is shown as an indication that the economic growth has lost serious momentum.

It is clear that this definitely has a positive side in terms of current account deficit. But because this will also lead to a drop in national income, it might be wrong to be happy about it. We might not see the expected drop in the current account deficit to the national income ratio, which is the real indicator.

The argument that interest rates should not be increased to avoid a slowdown in growth is getting weaker because the rapid deterioration in balances due to foreign currency is creating a huge lack of confidence.

When there is no confidence, even if there are no interest rate hikes, consumption and investment demand slow down.

The loss of confidence was confirmed by the 9 percent drop in the economic confidence index in August to 83.9 percent, compared to July.

In short, the continuation in the slowdown of the growth ratio looks like a natural and inevitable process independent of the Central Bank’s interest rates hike.

As was said to me by a banker, the government needs to accept the slowdown in growth in all conditions and needs to find the answer to the question of whether the drop in growth will be sharper if the Central Bank were to increase interest rates as opposed to if it were not.

We can say bankers are of the view that if the Central Bank were to avoid interest rate hikes, the drop in growth will be sharper, as this will increase the confidence crisis.

Erdal Sağlam, Turkish Lira, Turkish economy