20 Sept 2021
Erdogan’s Declining Patience: Expected Rate Cuts and Inflation
The Index Today
President Erdogan’s long-sought interest rate cut is finally being realized after the country’s central bank begins preparation. However, analysts doubt that the policy will take effect this week after the inflation rate hiked and the national currency began to fall.
Erdogan appointed Sahap Kavcioglu as its latest governor after which the bank kept its benchmark rate 19%. This has been ranked as one the highest policy rates along with a high inflation rate which was reported to be 19.24% just last month.
After taking on an aggressive approach which aimed to bring down the lira and allow it to recover, the bank is changing its stance. Kavcioglu did not go for a long established pledge that would keep the policy rate above inflation. Later, it was revealed that the inflation rate moved beyond 19%.
During a speech on September 8, Kavcioglu said that short term volatilities occurred due to a near 30% spike in goof inflation. He continued to say that the policy will predict a falling price trend in the last quarter.
Investors suggest that this approach will lead to rate cuts in the near future, which not be favorable. Ozlem Sengul, founding partner at Spinn Consulting said, “though most expect no rate cut, the banks new guidance suggests it would not be surprising to see on September 23 if I takes a slight deceleration in core inflation as permanent.”
Analysts are saying the president is growing impatient for monetary stimulus as loans are too expensive and an upcoming election in 2023 might become difficult. The rate cut could even lead to elections being preponed at an earlier date.
Inflation is expected to stay high throughout the month of October and may start to decline in November. According to government forecasts, inflation is expected to fall to 16.2% by December. As the country relies on imports, the Lira could become weaker and may even push inflation higher.