July’s inflation figures make it hard for a new interest rate cut

The inflation figures made public at the beginning of the week will continue to be debated, despite its consequences.

It has now become certain the Central Bank cannot meet its inflation target of 7.6 by the year-end.

In an inflation report released before the bayram holidays, Central Bank Governor Erdem Başçı signaled that a new 0.5 point cut would be implemented, with markets getting use to the news that a 0.5 point cut would come out from the Monetary Policy (PPK) meeting.

Başçı had said the market prices had shown that the 0.5 point new cut was correct and they agreed with that view.

Yet, the inflation figures, made public on Aug. 4, came out well above market expectations and as a result, their expectations began to change.

While some bankers said the “Central Bank can no longer make new interest rate cuts, preferring to wait a while,” some others said a decision for a 0.25 new cut instead of 0.5 could materialize.

Obviously there is a long time to go until the next PPK meeting, which will be held Aug. 27.

Above all, we need to look to the outcome of the first round of the presidential elections on Aug. 10.

In addition, whether there will be a second round or whether Prime Minister Recep Tayyip Erdoğan will win or lose, and even the margin he wins by, is a subject of discussion not only for politicians, but also for the markets.

Presidential elections

Had the presidential elections taken place after the PPK meeting, I think we could have said the Central Bank could go for a 0.5 point interest rate cut despite the high inflation figure.

Yet, as the meeting will be held after the presidential elections, we can say it has become harder to make guesses regarding the decision.

In addition to the presidential elections, what happens in the region, as well as developments in the future, could also influence the decision on the interest rate figure. We need to take into account the possibility that the kidnapping of Turkish citizens by the Islamic State of Iraq and the Levant (ISIL) and the current conflict in Iraq will have consequences that could influence both our economy and domestic politics.

Yet, it is for certain that global financial developments, rather than all of the issues in Iraq will affect the markets and play a major role in the decision. Nevertheless, the recent monetary developments coming from the United States will interest emerging countries, including Turkey. 

In short, even though inflation figures will not permit a new interest rate cut, these cuts will be implemented due to political reasons. Political acts, as well as global financial developments, will determine the interest rate decision. I hope economic stability will not be jeopardized by insisting on interest rate cuts despite all of the risks.