The emperor’s new clothes

waited decision of the CBRT came with a 100-basis point THE LONGɓA decrease in the key one-week repo rate. A downward signal was given a few weeks ago with the change in the benchmark that determines the direction of core inflation. Coupled with the change in the communication strategy, Governor Sahap Kavcioglu could only resist political pressures for a few months, or literally five Monetary Policy Committee meetings.

He was the most hawkish critic of the former Governor Naci Agbal, his predecessor. However, he was forced to keep the rates flat for a couple of months, on a sensitive track. As readers of our editorial column may remember, we underlined the market’s reaction to the potential decrease in the policy rate. But when a gun is taken out, it should be shot, as a Turkish proverb says. And one shouldn’t forget that it has consequences.

Previously, when the USD went from the TRY 3.5 level to over TRY 8, the lead actor that managed the markets was the Economy and Finance Ministry; the CBRT Governor was merely the supporting actor. Kavcioglu is the fourth governor since 2019. However, he is now the lead actor on the stage. He took his shot, with strong encouragement from the political throne, and the Turkish lira fell to record levels. As the rate dropped by 100 basis points, the USD saw TRY 8.85 on late Friday.

The main problem is not the drop in the rate but the old mentality that sees rates as the reason for inflation. Seen as a chicken and egg dilemma, one of the variables is not the determinant of the other, many suggest. The ideological stance of seeing interest rates as the mother of all evil, prevents one from understanding the economic dynamics and the real reason for inflation. The CBRT monitors the pulse of the economy more closely than anyone else. Its data sets are much more detailed and complicated than that of TurkStat, which we take as a benchmark. No doubt Governor Kavcioglu has a much broader data set than we do. However, like all others should have done, he should also share some of it with the market, to convince it of the wisdom of the rate decision. By doing that, he could win the lost credibility of the Bank in the market.