Will the debate on interest rate revive in Turkey?
One can expect the “classic interest rates” debates to revive as we are heading toward the local elections slated for the end of March.
It looks difficult for interest rates to drop in the next three months as it is difficult to expect the Central Bank to lower interest rates.
For some time we haven’t witnessed statements addressed to the public in which the government is complaining about banks. This seems due to the increase in the cooperation lately between the government and the Banks Association of Turkey.
But it has become customary for politicians to complain to the public about banks during election season.
As we approach elections, an absence of a drop in interest rates and, to the contrary, an eventual hike could trigger a debate in public about interest rates.
Obviously banks will remain silent during this debate.
They might even take compromising additional steps as they have been doing so for some time to avoid a contention with the government.
But these will be cosmetic, and even if they were to come with low interest rates in certain cases in order not to risk the balance sheet one can say in confidence that these steps will not be activated in implementation.
It is very difficult for interest rates to drop because the expected trend in the inflation, the intensity of debt payments and the election itself are the biggest obstacles in front of a drop. That’s why we need to register that the continuation of methods to give the impression of interest rate drops via the treasury bids that have been used for some time will lead to bigger troubles in the future.
Even though it looks unlikely that the Central Bank will drop interest rates I have to share my observation that small drops until the elections will not be found odd by the markets.
Foreign funds seem to expect small drops in case of a slowdown in the inflation. Personally I believe a cut by the Central Bank at this stage will create a serious risk especially in terms of foreign currency.
At any rate, even if the Central Bank were to lower interest rates, one should not expect markets’ interest rates to drop in the same level, because in the first three months, especially in February and March, internal and external debt payments are extremely heavy.
And when you add the increase in the public spending in the first three months, the efforts to comfort the markets, which are natural reflexes during election time, it will become crystal clear that with a lot of spending it will be unlikely to expect lower interest rates in the markets.
That explains perhaps why banks’ account interest rates do not decline despite the drop in the Treasury’s interest rates.
One has to see that the fundamental issue is to slow down inflation permanently, to create structural reforms and restore confidence in the economy with radical economic measures. Methods deployed to gain time cannot provide permanent stability.