Locked again on the interest rate debate

With the appointment of a new chair of the Central Bank, Murat Çetinkaya, the debate on interest rates has again become heated. Everybody in the markets spoke about the rate decision Çetinkaya would make in his first meeting. Before the Monetary Policy Council (PPK) meeting, almost nobody questioned why the rate should be decreased. We only talked about how many points of rate decrease would mean what.  

This is not only a debate in the media; all the markets have been locked on the interest rate debate. Not only domestic markets but even foreign investors were involved in this debate, and, of course, politicians…

In this period, the only contrary view we have only seen is world famous economist Daron Acemoğlu telling daily Hürriyet, “If it were up to me, instead of decreasing the rate, I would increase it.” 

I think what Acemoğlu meant was the reference to the fact that interest rate discussions were Turkey’s secondary issues; in fact, there is a need for a serious change in Turkey’s economy policies. 

As he has been saying for the last four or five years, Acemoğlu said it would be a mistake for Turkey to decrease rates: “Because the problem is not inflation. Inflation is an indication. At this moment, inflation shows that everything in Turkey is growing dependent on loans; and investments are not correct. If we do not make any reforms, if we leave everything as it is but only increase rates, this will not help private sector investments.”

These words should be considered together with the recent demands voiced by the president and his advisors as “Banks should lower loan rates.” 


Current growth 

Acemoğlu said Turkey should exit the current system of growth: “Instead of the growth entirely based on government support and demand, and the consumption of the consumer through loans, productivity should be adopted. For this, correct investments, savings and an increase in total factor productivity are needed.” 

He said, “If you slightly increase the rates and decrease the inflation, then the increase in real rates will not be that much and imbalances will start decreasing. If you cannot keep the nominal rates very low and moreover, if you cannot decrease inflation, then you will create more imbalances.”

When Fed decisions are superficially reviewed, it looks as if they are in favor of Turkey “but when looked deeper, they have actually affected us negatively,” he said, adding that our biggest mistake was continuously attributing our issues to international factors. 

Acemoğlu also said that in Turkey, the dependency of businessmen on the government hampers creativity and productive investments. 

As you can see, Turkey’s economic issues stem from much more fundamental problems and Acemoğlu is referring to them.

The last interest rate debate, as a matter of fact, remains as quite a small detail beside the fundamental issues. 

Discussing the details without going into essential matters must be easier for everybody and also less risky…