As inflation remained high in February after January, questions about the policy rate started to be asked one after another.
I have categorized the questions about interest rates into three groups as in the title.
- One; will it be necessary to raise interest rates?
- Two, if it seems necessary, when?
- Three, even if it will be necessary, will it be allowed?
Now let’s go in order…
Is a hike necessary?
The answer to this question was given by the Central Bank, at least on paper. The statement on the last meeting of the Monetary Policy Committee said:
“In case of a significant and permanent deterioration in the inflation outlook, the monetary policy stance will be tightened.”
I wonder if the Central Bank views the 6.70 percent and 4.53 percent increases in the CPI in January and February as “normal”. The January rate did not seem to cause much discomfort, it was characterized as a situation specific to that month, but we do not know what is being thought about February.
More importantly, does the Central Bank foresee a significant and permanent deterioration in the inflation outlook based on these rates?
If the Central Bank is not of this view, that is, if it has no concerns about the course of inflation in the coming months, there will be no need for a rate hike, of course, and such an issue will not even be on the agenda.
When if necessary?
In the February price developments report published yesterday, the Central Bank draws attention to an ongoing habit in CPI. The report emphasizes that “price increases in the services group continued to spread across the whole with the ongoing reflections of the backward indexation trend”.
In fact, this indexation trend is neither new nor will it end anytime soon. Therefore, since this indexation will continue, will the Central Bank see a risk for the coming months based on this fact?
Of course, this trend alone is not enough to review interest rates; other factors should also come into play.
For example, the overall level of price increases in March and April. Of course, the factors that cause these increases will also be important, but the overall level is of great importance.
The Central Bank had expected seasonally adjusted inflation to be around 4 percent and 3 percent in January and February. However, the realization was approximately 5 and 4 percent. I say approximate because there are various calculations on seasonally adjusted inflation and it is difficult to give a very precise rate. Not seasonally adjusted inflation was 6.70 percent and 4.53 percent; these are already announced rates.
I also wrote yesterday about the Central Bank’s monthly forecast for the whole year. The seasonally adjusted inflation forecast for the March-June period is 3 percent per month. But if inflation rates are much higher than 3 percent in this period, will the Central Bank read this as “a permanent deterioration in inflation”?
Let’s remember what Central Bank Deputy Governor Cevdet Akçay said at the meeting where the inflation report was announced:
“We have no intention of waiving our 36 percent annual inflation forecast, but when we see that it is unattainable; if you ask what the basic criterion is, let me put it this way, annual inflation is coming down, but the improvement in the underlying trend of monthly inflation has stopped, has stagnated, it is an alarm for us. It is not important that annual inflation is coming down. If we do not see the necessary improvement in that indicator, it is an alarm for us, so we take the necessary measures.”
The annual rate will go up until May anyway, but if the monthly rate is higher than expected, it means that an interest rate hike may be on the agenda. This could happen in May at the earliest, it seems.
Foreigners want the interest rate to be raised earlier and higher; for example, there are already people ordering(!) 5 points for April. They will want it, of course; in fact, it is not enough to increase interest rates, the exchange rate should also increase before or at least simultaneously, so that they can earn “both while coming and buying”.
But will it be allowed?
If annual inflation falls by 25 points in the three months following May, this will not require a cut in interest rates, if the framework outlined by Cevdet Akçay is followed, because monthly rates will be taken into account.
But look, the following situation may arise…
The base effect will start in June and become more pronounced in July and August. In three months, the annual rate will fall by 25 points. This will happen even if monthly rates rise much higher than the Central Bank predicts. What will happen if, on the one hand, the Central Bank wants to raise interest rates because its monthly forecast will be wrong, but on the other hand, politicians want to cut interest rates because the annual rate has fallen? Will we have an arm wrestle in this situation?
No, we will not!
Whatever politics wants, happens!
Aside from this assumption, how do you think politics will respond to requests to increase interest rates?
The answer to this question should be sought between the lines of Finance Minister Mehmet Şimşek’s statement that foreign investors’ interest in Turkey will increase significantly after the elections.
Why will the foreigner come after the elections and not now? Since the government and economic management will not change, what will change?
Are we going to raise interest rates or the exchange rate, or both?
I would like to remind you that the importance of real appreciation of the national currency in reducing inflation has been emphasized.
All of this seems to signal that an interest rate hike may happen in May, after the elections…
