Signals rising for new interest cut

Signals rising for new interest cut

Expectations in the markets that the Central Bank will continue its interest rate cuts have increased quite a lot. Almost all market actors expect that at this month’s Monetary Policy Board (PPK), the Central Bank will make an interest rate cut of at least another 0.25.

Alongside this expectation, the conjuncture in global markets constitutes a suitable platform for a new interest rate cut. The fact that economic recovery has been delayed in developed countries, starting with the Unites States, also shows that excess liquidity will continue for a long time. The extension of the abundance of liquidity, at the same time, is an indication that short term capital movements in developing countries such as Turkey will continue.

There, because of the re-acceleration of short term capital, it is seen that the valuation of the Turkish Lira in the domestic market has also accelerated. The 1.20 level that the Central Bank had set for intervention for appreciation has been exceeded.

We know that the Central Bank announced that interest rates would be cut as a measure against the overvaluation of Turkish Lira. When all these aspects are combined, the expectation of an interest cut from the Central Bank meeting this month has risen.

While some market experts have suggested that the Central Bank would make a 0.50 cut, others predict that it will prefer a small cut of 0.25, in order to observe the situation by suspending it over a longer period of time. The same experts also remind that the ambiguities around the Central Bank have risen, so it would be normal if they preferred a more cautious cut.

Government’s choice

We already know that the government also prefers an interest cut, regardless of conditions. Since the conditions are right, we can confidently say that the Central Bank will conform to the government’s tendency.
However, the risks that could emerge from an interest cut are evident. For instance, the experts reminded that foreign demand is declining, so domestic demand should be triggered in order to reach the growth rate the government aims for. They also say an interest cut would be appropriate for this, but it also poses the risk of increasing inflation again.

Also, it is taken for granted that the problem of the current account deficit, which went away from being a problem due to a small-rate growth last year, will recur again this year. Market analysts have already begun increasing their predictions for the proportion of this year’s account deficit to the national income. If the growth is made more dependent on domestic demand, it will be seen that the growth in the current account deficit will also gain speed.

To sum up, it is clear that Turkey will maintain its growth depending on short-term capital this year. The global cycle is suitable for this. However, if the growth is in large proportions we will also see that the risks caused by it will increase.

It would be good to keep in mind that we are set to enter a long process of elections, with local elections to be held in March 2014. Increasing government pressure is inevitable in this process in order to keep growth numbers high.