Central Bank says ‘no interest rate cuts’ but…
The Central Bank still maintains it is optimistic of the inflation rate, even as it continues to rise. In the inflation evaluation statement the other day, it was highlighted that core inflation indicators were positive.
It was also said in the same statement that the stagnation in domestic demand has curbed the extreme price increases because of foreign exchange rates.
Central Bank Governor Erdem Başçı made a presentation to the Banks Association of Turkey on the same day, pointing out domestic demand was having a mild contribution to growth. When considering domestic demand will increase as the June 7 elections approach, those parts which do not reflect on the prices because of the foreign exchange rate will naturally begin to reflect and this will increase inflation.
In his presentation to the banks, Başçı said cautious monetary and fiscal policies as well as macro cautionary measures have positively affected inflation, especially core inflation.
Başçı also said positive developments in foreign trade rates and the moderate course of consumer loans were supporting the recovery in the current account balance. He highlighted foreign demand continued to be weak however there was a mild increase in domestic demand which was supporting growth. Actually, he wanted so say, “Inflation is falling; growth is also increasing,” but it is not quite possible for him to be credible.
In this meeting, Başçı asked the banks to continue to extend their foreign maturity periods and said this would be beneficial in terms of growth. I think extending maturity periods is not something the banks can control. As long as the indefiniteness of the global finance system continues and as long as Turkey’s risk perception increases, it is difficult for this wish of Başçı’s to come true.
Optimistic in inflation
According to what we understand from Başçı’s presentation, we should not expect a cut in interest rates any time soon. He said the uncertainty in global markets and the increase in food prices necessitate the cautious monetary policy stance. Bank executives interpreted these words to mean there will not be any interest rate cuts in the near future.
Then, Başçı said that with the measures to be proposed by the Food Committee, there would be an additional contribution to the curb of food inflation. However, we can still say Başçı is being optimistic, given that although high food prices have been mentioned for years, there has not been a concrete measure taken.
Başçı’s most important message in this presentation is the one concerning the interest rates. However, we do not know whether the government, especially President Recep Tayyip Erdoğan, will continue to pressure for interest rate cuts as elections near.
If monetary policy is left to Başçı, no matter how optimistic he is, business will run smoothly or at least without making too many mistakes.