Warning from Mahfi Eğilmez to those with money in the bank: He gave a date for interest rate cuts

Economist Mahfi Eğilmez, in his blog post titled “The Timing of Interest Rate Cuts,” examined the interest rate decisions made last week by central banks, primarily the US Federal Reserve (Fed), as well as those in Europe and the Central Bank of the Republic of Türkiye (TCMB).

Eğilmez's article highlights his views on what factors influence interest rate cuts for the TCMB and when this issue might be resolved.

'THE ECONOMY IN TÜRKIYE IS DEPENDENT ON FOREIGN CURRENCY'

Stating that inflation in Türkiye is much higher than in other countries and that its problems and solutions differ, Mahfi Eğilmez reminded that Türkiye has lived with an average inflation rate of 38 percent for the last 50 years. Drawing attention to the “long-dominant phenomenon of dollarization” alongside inflation, Eğilmez touched upon the economy's dependence on foreign currency and pointed to “the very high total of external obligations that must be paid within a year” as another serious problem.

'ROLLING OVER DEBT TIRES THE ECONOMY'

“Although rolling over debt has not seemed to create a problem for years, it tires the economy just as high blood pressure tires the body,” says Eğilmez, who explained the public's shift toward pessimism with the addition of the “very high rate of informality” phenomenon in the following words:

“A portion of this informality stems from illegal transactions such as black money and drug trafficking. Wealth and income that remain outside the system in this way enter the system at the spending stage through money laundering mechanisms.

Türkiye cannot (or does not) tax these. Instead of searching for, finding, uncovering, and taxing them, it tries to cover public expenditures that are far from transparency and oversight by collecting a little more tax from existing taxpayers. Such approaches also fuel inflation. All of this creates pessimistic expectations in society regarding the future.”

'THE 3RD QUARTER WILL DETERMINE EVERYTHING'

In light of all this information, Mahfi Eğilmez stated that the answer to how long the TCMB will keep interest rates high lies in the 3rd quarter growth rates. Reminding that the GDP will be announced on November 29, 2024, and that the subsequent TCMB Monetary Policy Committee (PPK) meeting will be on December 26, he mentioned the following scenario:

“I believe that for the TCMB to cut the policy rate before this meeting, it would need to conclude, based on leading indicators, that third-quarter growth is heading toward zero and fourth-quarter expectations are heading toward negative (contraction), and that policymakers would need to share the same view.”