The ultra-low interest rates are being hailed by many economists these days. Some are even claiming that the policy rate could go as low as 5%.
With the CBT's latest cut, the ex-ante real policy rate now stands at 1.44%, a historic low for Turkey. The low-interest group counters that in many countries, rates are zero, or even negative. The problem is that such naive comparisons ignore country risk. Adjusting for country risk with CDSs reveals that Turkish policy rates do not have much more room to go, maybe another 50bp or so, which is in line with the 75bp cut embedded in expectations. And that is after noting that Turkish CDSs are low compared to the country's credit rating. But this doesn't mean much, as one of the main arguments of the low-interest camp is that Turkey's credit rating is too harsh to begin with, an argument I would agree, if I didn't know the dire state of fiscal balances in the medium-term- but that's a topic for another post.
International comparisons do not help much. While other flexible exchange rate, inflation targeting countries like the Czech Republic and South Africa have 0 real rates, Brazil's, Turkey's closest peer in my humble opinion, is higher than Turkey's. But then again, Brazil does not have an as large output gap.
There is some more room for policy rates, but not that as far as 5% some are recomemnding. That would be as surreal as the economists recommending that path...
With the CBT's latest cut, the ex-ante real policy rate now stands at 1.44%, a historic low for Turkey. The low-interest group counters that in many countries, rates are zero, or even negative. The problem is that such naive comparisons ignore country risk. Adjusting for country risk with CDSs reveals that Turkish policy rates do not have much more room to go, maybe another 50bp or so, which is in line with the 75bp cut embedded in expectations. And that is after noting that Turkish CDSs are low compared to the country's credit rating. But this doesn't mean much, as one of the main arguments of the low-interest camp is that Turkey's credit rating is too harsh to begin with, an argument I would agree, if I didn't know the dire state of fiscal balances in the medium-term- but that's a topic for another post.
International comparisons do not help much. While other flexible exchange rate, inflation targeting countries like the Czech Republic and South Africa have 0 real rates, Brazil's, Turkey's closest peer in my humble opinion, is higher than Turkey's. But then again, Brazil does not have an as large output gap.
There is some more room for policy rates, but not that as far as 5% some are recomemnding. That would be as surreal as the economists recommending that path...
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