Turkish Central Bank makes decision under pressure

The Central Bank announced its rate decision yesterday amid unending comments by politicians, who wanted a significant rate cut.

The Bank lowered its main interest rate by 50 basis points, mainly due to slowing inflation, under strong political pressure for a softer monetary policy ahead of the parliamentary election in June. It cut its one-week repo rate to 7.75 percent while leaving unchanged its overnight lending rate at 11.25 percent, its primary dealers’ overnight borrowing rate at 10.75 percent, and its overnight borrowing rate at 7.50 percent.

It is questionable whether that slight cut will be enough to satisfy the country’s politicians, led by President Recep Tayyip Erdoğan.

Last week, Erdoğan reiterated his long-established criticism of the Central Bank for not reducing rates, despite a sharp decrease in oil prices, vowing to question the Bank’s governor on the issue in person.

“We have no problems with oil prices. On the contrary, we are at a very good point. Therefore, we should find ways to let our people and our investors take advantage of this. What is the Central Bank waiting for?” he said at a meeting with young businesspeople on Jan. 16. 

“No one is uttering a word about high interest rates. While rates are being reduced across the world, only our Central Bank is not moving. We are in need of investment, employment and production. We should provide cheaper costs for investors in order to compete in the international arena,” Erdoğan added.

Many ministers followed him in urging the Central Bank to lower the rates, including Economy Minister Nihat Zeybekci.

Even after the Bank’s decision yesterday, Deputy Prime Minister Numan Kurtulmuş tweeted critically about the issue. “The Central Bank has fallen into a disassociating position with the economic vision of the political will with its rate decision,” Kurtulmuş stated.

“The 0.5 rate cut does not make any benefit to realizing Turkey’s growth targets and improving the real economy,” he added.

Zeybekci then also said the announced cut was "not enough," but added that they were hopeful of more cuts in the Bank’s next monetary policy meeting.

For many analysts, the Central Bank did the right thing by making only a slight cut. This is because the global markets are very complex right now, just before the launch of an expected bond-buying program by the European Central Bank and just after the Swiss Central Bank’s surprising decision to abandon the cap on the franc’s value against the euro, after which the franc soared as much as 30 percent in this chaotic trade environment.

In this environment, it might be the best thing for the Central Bank to make smooth moves, rather than radical steps, according to several economists. This is especially the case as Turkey’s economy is still very dependent on hot money going forward.

Besides, for the Turkish economy, the most positive economic development recently has been the slight decrease in the inflation rate last month.

As many have argued, decreasing oil prices may have a mixed effect on the Turkish economy. The oil plunge may well decrease the current account gap, but it may also bring added negativities to the economy amid rising economic problems in Russia and the surrounding region.

In such a fluctuating moment, the last thing a central bank needs are too many political comments about its moves, undermining its credibility.