Policy rate for the next three months is clear; let’s split up!


Recep Tayyip Erdogan removed any doubt as to what would PRESIDENT happen with the policy rate until the end of 2022. It’ll be brought down to single digits by the end of this year.

Rate cuts started in September 2021. This year, they started in August.

The 7-month policy rate, which was 14%, was reduced to 13% in August, and further cut by one point to 12% in September.

‘Tis the season! From now on, we cut the interest rate by one point each month.

11% in October, 10% in November, 9% in December, and 8% in January.

8% is good, no?

That can’t happen, can it? Guess what, it will!

The annual inflation hike will slow in December and January due to the base effect. The government will tell us that the policy rate fell and therefore so did inflation, per their new economic theory.

I have long preferred to say, ‘’The policy rate of the Central Bank (CB) was reduced,” rather than, “The CB reduced the policy rate.” The CB’s Monetary Policy Committee stopped having any effect on the interest rate a long time ago. The bank used to claim, falsely, that it was independent, but this has all fallen apart in recent months. Now, the bank is openly a tool of the government and the President.

The rate cut is justified as supporting investment, employment, production, and growth, as always. If the level of the interest rate was sufficient to achieve these objectives, this approach would be true. But a low-interest rate is useless alone.

Moreover, this policy rate is the interest rate implemented by the CB for banks. Other interest rates don’t decrease when the policy rate is cut.

Let’s assume that banks’ interest rates decline when the policy rate is cut. The cheapness of a good or service is meaningful only if it can continuously be supplied. Who will benefit from loans if banks reduce the loan interest rate? We can’t say that there will be widespread, inexpensive loan usage. These rate cuts are for appearances’ sake.

These moves will further increase foreign exchange rates and the inflation that will result. As the annual inflation enters a decline in December due to the base effect, the hike in monthly rates won’t be felt that much, and the government will say that their policy was a success.

The script is well written. As it has an audience, it will be successful.

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