All eyes on Turkey’s Central Bank - LEVENT YILMAZ

All eyes on Turkey’s Central Bank

Following the cabinet meeting on Tuesday, Turkish President Recep Tayyip Erdogan announced new measures to stem the novel coronavirus, thus a new chapter in the fight against the virus has begun. It is crystal clear that the new decisions that had to be taken to protect the health of the public will have impact the economy as well. With the partial lockdown, today’s decision by the Central Bank Monetary Policy Committee has only become more important.

What are the new measures?

The new measures announced following the presidential cabinet meeting on Tuesday are as follows: On weekends curfew is to be in place during the hours of 8 p.m and 9 a.m., so supply and production chains won’t be disrupted. Malls, markets, restaurants and hair salons will work between the hours of 10 a.m. and 8 p.m. Restaurants and cafes will only conduct take-away services. Education will continue online till the end of the year. Sensitivity will be displayed in the determination of flexible working hours of the public and private sector and it will be determined in a way that will not overcrowd businesses. A curfew will be determined for those over 65 and under 20, excluding those who have to work. Cinemas are to remain closed till year-end. All these new measures can also be interpreted as a partial lockdown of the economy.

What are the expectations of the Central Bank?

All eyes are on Turkey’s Central Bank today. The Monetary Policy Committee (PPK) will unveil its decision at the first central bank meeting under new governor Naci Ağbal.

Contrary to the facts of the reel economy and in spite of the latest measures, the general perception is that the PPK will raise interest rates. What’s interesting is how fickle all the predictions are for the new rate hike. On the one hand, Morgan Stanley predicts that a 150-point hike would suffice, whereas other platforms state that nothing under 450 or 500 points would be enough. There are claims that state an interest rate hike under this number would speed up capital outflow and put pressure on the exchange rate. Well, what does a U.S. Central Bank FED study have to say about this?

What does FED advise central banks of developing countries to do?

According to the Akıncı, Benigno and Queralto study published by FED, the interest policy that should be implemented against the sudden halt in capital inflows caused by COVID-19 is a lot different than the clichés of the mainstream economy.

The study reveals the disadvantages of developing countries’ central banks that are hesitant to slash interest rates because they’re faced with capital outflows and a concern regarding foreign currency rates.

According to its findings, the study reveals that lowering interest rates later than usual and beneath what it should be could bear more destructive consequences for short-term gains.

During the sudden stop in the global economy caused by COVID-19, developed countries slashed interest rates more than emerging economies.

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