The interest rate cut oasis and the liquidity mirage

Global markets are witnessing a period in which central banks have entered an interest rate cut cycle following a long-standing battle against inflation. This process has created a sense of relief and enthusiasm among investors. However, the interest rate cut oasis, much like the "revenue intoxication" I have written about in the past, is merely a dangerous illusion that masks structural problems.

In recent weeks, I addressed the growth delusion of companies in my column titled "Revenue intoxication and the recession diet." Today, we are facing a similar misconception at the macroeconomic level. While central bank interest rate cuts offer short-term moral support to markets, this situation carries the risk of remaining a liquidity mirage. This is because falling interest rates can create an anesthetic effect that keeps inefficient business models alive and delays the liquidation of zombie companies.

WHAT ARE THE MARKETS CELEBRATING? 

The European Central Bank (ECB) lowered its benchmark deposit rate by 25 basis points to 4.25% at its meeting in June. This decision was significant as it marked the ECB's first rate cut since 2019. Subsequently, the Swiss National Bank lowered its rate to 1.25%. The Bank of England continues to signal further cuts. Meanwhile, the Fed has brought the upper limit of its policy rate band to 4.75% as part of its own cutting cycle.

Markets are welcoming these developments with enthusiasm. However, the justification for this enthusiasm is debatable. Global debt ratios are at record levels. According to the International Monetary Fund's (IMF) April 2026 Global Financial Stability Report and IIF data, total public and private debt worldwide has exceeded 330% of global GDP. This massive debt burden poses a serious threat to sustainability, even if interest rates fall.

WHAT IS THE SITUATION IN TURKEY?

The picture is more complex in the case of Turkey. While the CBRT maintained its tight stance by keeping the policy rate (one-week repo auction rate) steady at 37% at its Monetary Policy Committee meeting in June, the effective cost in the market is gaining weight at the 40% level, which is the overnight lending rate that provides the liquidity banks need. In the markets, expectations for easing in the second half of the year are being discussed. According to inflation data released by the Turkish Statistical Institute (TÜİK) in May, annual CPI stood at 73.66%. Although this rate shows a downward trend compared to the previous month, it is still not a sufficient level to declare an early interest rate cut oasis.

THE TRUTH BEHIND THE OASIS

Another issue as dangerous as the interest rate cut oasis is the perception bias created by an abundance of liquidity. A low-interest-rate environment provides a large flow of cheap money into the market. In the short term, this pushes stock indices up and increases risk appetite. However, according to recent analyses by the Bank for International Settlements (BIS), more than half of global liquidity expansion is directed toward risky segments with low or negative profitability.

Various economic analyses indicate that a significant portion of businesses in Turkey consists of enterprises whose operating income cannot cover debt repayment costs but which remain afloat thanks to low interest rates or debt rollover mechanisms. Instead of revitalizing these companies, interest rate cuts deepen the waste of resources by delaying their natural selection process. At this point, the interest rate cut oasis, like a mirage seen in the desert, prolongs the journey instead of quenching thirst.

STRUCTURAL REFORMS ARE ESSENTIAL 

Interest rate cuts are not a cure for the fundamental illnesses of the economy, and they can even become an excuse to postpone structural reforms. Issues such as productivity growth, innovation, value-added production, and qualified employment are pushed to the background behind the allure of cheap money. Yet, what Turkey needs is permanent growth and sustainable development.

The "Future of Competitiveness" report published by TÜSİAD emphasizes that while Turkey's share of total exports in medium- and high-tech products hovers around 38%, this rate remains well behind the total technological export power of South Korea, which reaches 68%, and China, which reaches 62%. A low-interest-rate environment slows down the transition by preserving the status quo rather than encouraging such structural transformations.

THE END OF THE MIRAGE

Historical data shows that periods of enthusiasm that begin with interest rate cuts are mostly short-lived. The interest rate cuts that followed the 2001 and 2008 crises initially created rallies in the markets, but left lasting damage as structural problems resurfaced. According to current data from the Institute of International Finance (IIF), although capital flows toward emerging markets are increasing, approximately 70% of these flows are in the form of portfolio investments and are therefore short-term and volatile in nature.

Real sector representatives and policymakers should act without falling for the allure of the interest rate cut oasis or being deceived by the liquidity mirage. While falling interest rates alleviate the debt stock, they are not sufficient on their own to improve the investment climate, implement institutional reforms, and strengthen the education and R&D infrastructure.

Let us remember once again: how dangerous the illusion in balance sheets was, with company landscapes that dazzled as revenue grew but vanished as profitability fell. Today, the liquidity mirage behind interest rate cuts feeds the same delusion. Markets cheer as central banks cut rates, but time will tell how long this joy will last.