Expectations from the Fed and Turkey’s interest rate debate

The recent strong employment data coming from the U.S. has changed estimations regarding the Federal Reserve’s possible interest rate hike. This will affect liquidity deeply.

Debates on interest rates and foreign currency exchanges will be revived depending on other global developments and the Fed’s decision.

Before the Eid holiday, those who thought the Fed would not raise interest rates this year were in a majority. With the recent employment data it is now the other way round: The number of those who think there will be an interest rate hike by December is increasing.

There are some who even expect a hike in September.

In Turkey too there was a significant majority who believed the Central Bank would make a 0.50 percent cut this month, despite the bad inflation rate made public before Eid.

But expectations of a 0.50 percent cut have started to increase as of this week. Still, we will have to wait a little longer for our interest rate debates to clarify. As the date of the decision approaches, I think the number of those expecting a 0.25 percent cut might increase.

As of now, however, those expecting 0.50 percent cut are still in the majority.

I believe the market’s interest rates, especially credit interest rate, will be much debated in the coming period. The government has been responding to the fact that credit rates are not falling in parallel to cuts by the Central Bank. That’s why it has started to say any additional measures will be tame.


Banks reluctant

The banks do not harbor their former appetite for credit because of big concerns regarding Turkey’s economic growth. Banks are giving 20 percent more than the savings they have, which itself shows the reason for their concerns.

In addition, it was easier in the past to provide foreign capital. This is no longer the case. Due to global developments, banks cannot easily borrow and turn foreign capital into credit.

Another reason for anxiety on credit is the fall in the banks’ profits.

The ratio of the rise in banks’ credit remains below the credit interest rate, and when that is the case banks tend to avoid increasing their credit.

In the meantime, we also need to take into consideration the rise in problematic credit. The fears that growth rates might remain low, and even the expectation that they will remain low, feed on the danger of a more problematic credit issue. That issue is just another deterrent factor.

But despite all these deterrent factors, the government wants banks to lend much more and give cheaper credit, thus reviving growth in Turkey.

That is why it seems we are going to be talking much more about credit in the coming period.