Central Bank can now cut rates easily

Central Bank can now cut rates easily

The lower than expected inflation figures of August have strengthened the possibility that the Turkish Central Bank will cut interest rates. After half-point rate cuts, last month there was a 0.25 cut, which prompted debates on whether the Central Bank’s cuts have come to the end. However, following the inflation data released at the beginning of this week, everyone started to think that another cut was inevitable. 

Even before the inflation figures were released, some market players had thought the Bank might cut rates. Now with the low inflation rate everyone started expecting rate cuts, as the Central Bank’s hand would be strengthened. 

According to the inflation figures released earlier this week, while a 0.15 percent decrease was expected in August in the consumer price index, this figure was 0.3 percent. Annual inflation at the end of August therefore fell from 8.8 percent to 8.1 percent. 

The annual core inflation rate - which does not include food, energy, alcoholic drinks, tobacco products and gold, and which is more effective on Central Bank’s rate decisions - has also dropped from 8.7 percent to 8.4 percent. The decreasing trend of this core inflation rate is an important factor strengthening the possibility of rate cuts. 

Meanwhile, it is also apparent that the fall in food prices and the fall in clothes and shoe prices are influential. Related cabinet ministers are claiming that these drops will continue, but we should doubt whether price drops stemming from end of season sales and the increase in production will continue in the coming months. 

Global climate also suitable 

Because of the high base effect of last year, the drop in annual inflation can be expected to continue in September and October. However, in the last two months the base effect could increase annual inflation. Therefore even though the latest inflation figures are encouraging, it still seems quite difficult to remain within the 7.5–8 percent band foreseen for the end of the year. 

Meanwhile, the impact of foreign exchange rates on inflation decreased in August. As a result, upward movements in the foreign exchange rates from now on have the risk of increasing inflation once again. 
While it is considered to be certain that rate cuts associated with inflation will continue, it is clear that the global climate will also assist this. After U.S. Federal Reserve President Janet Yellen’s latest speech, expectations for rate increases by the Fed in September increased, but those expectations against started falling seriously with the worse than expected non-agricultural employment data. 

The fall of the dollar stemming from this recent expectation also therefore provides a suitable platform for the Turkish Central Bank’s interest rate cuts. 

But it should not be forgotten that despite these expectations, serious political and economic risks are continuing domestically, so the Central Bank should act cautiously.