Economist Prof. Dr. Hayri Kozanoğlu: From this stage on, the cooling effect of sharp interest rate hikes on the economy will be discussed

Economist Prof. Dr. Hayri Kozanoğlu evaluated the situation following the CBRT's 500 basis point rate hike.

Kozanoğlu's assessments are as follows:

First, let's recall this point; in its last Inflation Report dated November 2, 2023, the Central Bank raised its year-end 2024 inflation forecast from 33% to 36%. Because the 33% figure had lost all credibility. However, this revision strengthened the belief that the Central Bank does not have a systematic inflation target and is making updates based on economic developments, just like those making external estimates. It led to its credibility being questioned in the eyes of the "markets." For this reason, the Central Bank felt compelled to embark on a bold interest rate hike. Moreover, it sent a message that new interest rate hikes could come in the coming months, albeit at a slower pace.

Let's remember that the number one goal openly stated by the economic management was to attract foreign capital to avert a balance of payments crisis. The Western world is entering the Christmas season. Inactivity will dominate financial markets until mid-January. Therefore, it can be said that an accelerated interest rate hike was adopted to issue an urgent invitation.

It can be estimated that the medium-term game plan of Mehmet Şimşek and his team is as follows: Central Bank interest rate hikes will have an upward effect on both deposit rates and loan interest rates. The rise in TL deposit rates will invite the affluent segments to deposit their money instead of directing it toward consumption such as housing, automobiles, white goods, etc. The rise in loan interest rates will both make it difficult for individuals to continue their consumption by borrowing and will slow down firms' investments. It will create a cold shower effect on domestic demand through both the deposit and credit channels.

This will, on one hand, stop economic growth and increase unemployment, and on the other, escalate discontent among the broad masses of the public. As a precaution against this, three steps have been planned. First, the freezing of credit card interest rates for now. Considering that the individual credit card balance has exceeded 1 trillion liras, this is to prevent the spending of those who are just making ends meet from stopping completely and to prevent their reactions from rising. The Financial Stability Report already states that 62% of credit card debt balances consist of debts where only the minimum amount was paid and the full amount could not be closed. This means people find the interest rates high, but they do not have the power to zero out all their debts. Second, keeping the discount rate constant in rediscount credits for exporters. Thus, continuing support for foreign exchange-earning transactions. Preventing their complaints stemming from the fact that exchange rates are not rising too much. But the third and most important leg is the raises to be made to the minimum wage and the salaries of public employees/retirees at the beginning of the year. In this way, more cash will pass into people's hands, and the phenomenon called money illusion will come into play. The increase in the reactions of ordinary citizens will be prevented until the local elections.

Even the Central Bank's inflation report admits that inflation will hover in the 70-80% range in mid-2024. The measure considered for inflation to decline in the remainder of the year is to increase the minimum wage only once a year. This will lead to a decline in the purchasing power of workers and a weakening of demand with each passing month. Towards the end of 2024, the economy will slow down significantly, and unemployment will jump noticeably.

Let's go back to the beginning if you like. Let's not forget that the main goal is to attract foreign money. An environment where interest rates remain high, the pressure on the exchange rate is relatively reduced due to the slowing of import demand, and reserves are showing a tendency to recover is ideal for hot money. Since the election period is also behind us, it will not be difficult to convince the Palace. The Şimşek-Erkan duo will also have proven their loyalty to the international financial circles from which they emerged.

In summary, the Mehmet Şimşek-Gaye Erkan team may approach their goals by freezing the economy with strictly tightened monetary policies. In the meantime, the decline in the purchasing power of ordinary citizens, the deepening of poverty, and the rise in unemployment do not concern them much.