Was the last interest rise 'rational'?

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The Central Bank of Turkey had risen the interest rates after 27 months on June 22, following the May 14 and May 28 elections, and the second rise by the bank came yesterday (July 20). However the 250 basis points increase in the interest rate, from 15 percent to 17,5 percent, by the new economy administration with Mehmet Şimşek and Gaye Erkan, was below expectations. 

Economist Prof. Dr. Hayri Kozanoğlu says that the expectation was that the interest rate would be increased 500 basis points, from 15 percent to 20 percent. 

"Even such an increase was not sufficient in the current conditions in Turkey, taking into consideration that the inflation will jump in the following days," Kozanoğlu said. 

Only an increase to 20 percent would be a significant message that the rhythm of increasing interest rates would continue, he believes. "This would give the impression that the interest rate would be raised to 25, 30, 35 percent in the following periods. And this would result in the exchange rates becoming stabilized," he said. 

"The limited rise did not give a positive impression"

The 250 basis points increase will not make the interest reach to the level that the market demands, argued Kozanoğlu.

"There was a 650 basis points increase on June 22. If you decelerate this to 250 basis points, this means that the increase will be made slowly, taking small steps like this. And this will not help the interest rate to rise to the level that the markets are demanding," he added. 

The economist asserts that, if, on the contrary, we see higher interest rate hikes in the following months, this will inevitably give the impression that the economy is hard-pressed, which will be a bad signal to the markets. Therefore this interest rate increase did not give a positive impression for the new Governor of the Central Bank, he argues. 

Kozanoğlu thinks that the new economy administration is also aware of this but they were allowed to make a rise that is only this far, and the Palace (Presidency) stopped Mehmet Şimşek and Gaye Erkan from increasing the interest rates further. 

"Irrational policies helped Erdoğan win the elections"

Kozanoğlu also talked about the statements by Mehmet Şimşek on "becoming rational."

"From his statements follow that Nureddin Nebati and Şahap Kavcıoğlu, thus the previous economy administration was irrational. In fact I do not agree. Erdoğan obtained the results he wished for in the May 14 and May 28 elections by this means. I leave aside the injustices, the irregularities, etc. in the elections; but he showed a better performance than that was expected," he said. 

He agrees that "the irrational policies have disrupted the economy" and "left us a heavy toll to pay." 

"But they were able to keep the dollar under 20 lira," Kozanoğlu underlined. 

The new policies, described as "rational," show that we are taking a new route, he says. But all reserves of the Central Bank have been used up in order to pursue the previous policies, he adds.

"I believe that the main policy today is to prevent a balance of payments crisis and to strengthen the reserves. So no step is being taken for fighting inflation, which is an issue that we are all concerned about. The inflation seems to be left unchecked. However there is an increase in the reserves as we see in the statistics of the Central Bank today," Kozanoğlu stated. 

He believes that this shows that the Central Bank is purchasing foreign exchange in order to strengthen its reserves. 

"The inflation will rise even further in the following days, but I do not think that they care much about this," the economist says.  (HA/PE)