Policy rate cut 1.5 points


I was wrong, but I wasn’t the only one. Almost everyone expected the policy rate to be reduced by one point, but it was cut by 1.5 points. The policy rate was cut from 12% to 10.5%.

An important detail indicating what will happen in the coming period was included in the Central Bank’s (CB) Monetary Policy Committee (PPK) statement.

As the policy rate was reduced from 13% to 12% in September, it was assumed that there would be 1-point cuts for the rest of the year. The policy rate was supposed to be cut to 9%, a single digit.

President Recep Tayyip Erdogan made statements in this direction and said the rate cuts will continue and the policy rate will fall to a single digit.

But the PPK statement shows that the policy rate will decline to 9% before December.

Here is what the PPK said in the statement after it expressed its decision to implement a 150-basis point rate cut:

“The Committee will take a similar step in the next meeting and will end the rate cut cycle.”

This issue seemed to be discussed and planned before the PPK meeting. The Committee has now made a preliminary announcement.

So, we can say the interest rate will be cut to 9% at the meeting on November 24, a month earlier than expected.

The justification for the rate cut is always the same, the statements have been very similar for the past three months. However, two additional words were added to the statement this month. Here is what the statement said:

“It is (critically) important that financial conditions remain supportive to preserve growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties with regards to global growth and a (further) escalation of geopolitical risks. Accordingly, the Committee has decided to reduce the policy rate by 150 basis points.”

The words ‘critically’ and ‘further’ weren’t included in the previous two statements, and they were added to this statement. Apparently, expressions were an attempt to make the statement stronger, but the just was the same.

Let’s assume that it’s December. Although the interest rate in the market is different, the CB’s policy rate is at 9% and USD/TRY hovers around 18.00-19.00.

Let’s assume that the date is Tuesday, January 3, 2023. The monthly inflation of 13.58% last December is gone, replaced by 65%.

Let’s assume that the date is Friday, February 3, 2023. Monthly inflation rose to 11.10% in January and the annual rate fell to 50-55%.

The rate of increase in inflation will slow while prices will continue to increase, but the government will argue that prices are declining.

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