CBRT to announce tomorrow: Interest rate forecast from economic columnist

The Monetary Policy Committee (MPC) of the Central Bank of the Republic of Türkiye (CBRT) will meet on Tuesday, July 23, under the chairmanship of Central Bank Governor Fatih Karahan.

The interest rate decision will be announced at 14:00 on the same day.

As markets turn their eyes to the CBRT's interest rate decision, Ekonomim columnist Alaattin Aktaş stated that there might not be any change to the policy rate. Aktaş also touched upon the expected decline in inflation in the coming months due to the base effect and noted that the Central Bank should clarify which criteria it uses as a benchmark for interest rates.

The relevant section of Aktaş's article titled 'The interest rate won't change, but let's see if those critical sentences will change?' is as follows:

"The policy rate will most likely not be changed and will be kept steady at 50 percent.

There is absolutely no question of an interest rate hike.

While cutting the interest rate is on the agenda, it is not on the table in terms of timing.

Therefore, we will see that the interest rate is kept steady at 50 percent in tomorrow's announcement.

WHAT ABOUT THE PHRASING?

The interest rate will most likely not change, but the question now is whether the sharp expressions included in the Central Bank's interest rate decision statements to date will be preserved exactly, or if we will see a softening in these expressions.

What has been said in the MPC statements so far:

‘The tight monetary policy stance will be maintained until a significant and permanent decline in the underlying trend of monthly inflation is achieved and inflation expectations converge to the projected forecast range.’

This expression relates to the conditions under which the tight monetary policy or relatively high interest rates will continue to be applied.

There is another expression that no longer carries much importance. That expression points to when the necessity of raising interest rates again might arise:

‘In case of a significant and permanent deterioration in inflation, the monetary policy stance will be tightened.’

‘WE LOOK AT THE MONTHLY, NOT THE ANNUAL’

I mentioned it a moment ago. Since an interest rate hike is no longer on the table, the second sentence has lost its importance. What matters is the first sentence regarding the continuation of the tight monetary policy.

The Central Bank management has insistently and repeatedly emphasized that they will look at monthly rates, not annual trends, for interest rate cuts. The expression included in every MPC meeting text is very clear:

‘In the underlying trend of monthly inflation...’

Does the Central Bank not know that annual inflation will fall rapidly, especially in July and August, but that this will stem from the base effect? Of course, it knows.

The Central Bank, anticipating that this trend will create a demand, or even a suggestion, or further pressure, and eventually turn into an order saying, ‘Come on, inflation is falling, let's cut the interest rate now,’ is already setting its stance.

However, expressing this view, which can be summarized as ‘There is no decline in the underlying trend of monthly inflation yet, so it would be wrong not to cut the interest rate,’ is one thing, but standing before a politician with this view and ensuring that the right thing is done is another.

We have seen many examples of this in the past; because ‘orders override the law’ in the economy, you might find that the interest rate has been cut even during a period when it was said ‘it is not the time.’

SO WHEN IS THE TIME FOR AN INTEREST RATE CUT?

This is what is being debated now; when should the interest rate cut begin?

There are two answers to this question...

The first is the ruthless answer: ‘Whenever politics wants.’

The second is the economic answer: ‘Whenever the Central Bank deems it appropriate.’

However, to have a sound opinion regarding the second answer, the Central Bank needs to clarify a definition.

The Central Bank keeps saying monthly inflation, but what is meant here is not the headline inflation we all see.

When the Central Bank says ‘the underlying trend of monthly inflation,’ it is referring to a seasonally adjusted calculation. Governor Karahan had said that they could explain this rate or calculation upon being asked what was meant by this expression, but there has been no development on this matter so far.

Therefore, although annual inflation is expected to fall below 60 percent by the end of July and below 50 percent by the end of August (according to the path to reach 38 percent), the Central Bank does not care about this; but then again, it is not known what the rate that is cared about and followed on a monthly basis is.

In other words, what monthly levels will mean ‘Okay, a permanent and significant decline in inflation has been achieved’ for the Central Bank is almost a secret.”