Economy: When can a positive real interest rate be achieved in Turkey?

One of the main targets of Turkey’s economy administration is certainly to reduce inflation soonest possible without having to increase interest rates excessively so as not to cause a very negative strong impact on economy and the business world, companies to be in the first place. Regarding this topic a prominent economist (Alaattin AKTAŞ) has shared an important article (on ekonomim.com.tr), translated by BTT and published below.

When can a positive real interest rate be achieved in Turkey?
by Alaattin AKTAŞ (ekonomim.com.tr)

“Just a few days ago, I wrote that we are truly a strange country. We can say one thing today and the opposite tomorrow; we can declare today’s truth to be entirely wrong tomorrow.

Moreover, it’s the same government that’s making these zigzags. The economic management changes, and with it, the economic policy changes, no matter what you call it, all for the same apparent goal: reducing inflation.

Just a few months ago, we were striving to lower interest rates. Then we changed our policy. However, we changed it only to express our satisfaction with the decrease in deposit interest rates. You would think there was a significantly high nominal interest rate that we were pleased with the decline.

Now, we have left behind that policy, that is, being “pleased with the falling deposit interest rates.” Now we are talking about positive real interest rates. Well, let’s see! We are going to give real interest rates, but when will this happen?

How?

The ways to achieve a positive real interest rate are clear…

Either nominal interest rates will increase, or inflation will decrease, or both will happen. There’s also the possibility that inflation will decrease so much that even if interest rates decline, real interest rates will increase.

Mehmet Şimşek, the Minister of Finance, mentioned the concept of a positive real interest rate. Which of these options are we approaching to realize it? Let’s go through them one by one…

Interest rates are increasing

The Central Bank announces the interest rate formed on average by all banks every week, and we can see that there is an increase in nominal interest rates. The latest data is for October 6th. It is known that deposits are concentrated mainly in the 32-day maturity category. The 32-day maturity falls into the category of deposits with a maturity between 3 and 6 months. The average interest rate for these deposits was around 45% on October 6th. After deducting withholding tax, the net interest rate drops to around 43%. It is known that the average interest rate on some first-time accounts in banks is pulled upwards. Therefore, it wouldn’t be wrong to say that the net interest rate is around 40%.

I mentioned that there is an upward trend in interest rates. The interest rate on October 6th was 45%, while it was 41% for the same maturity one month ago, and 28% two months ago. It is clear that the direction of interest rates is upwards and will continue to rise, but it is difficult to predict how far.

Inflation will remain flat for a long time

On the other hand, another factor for a positive real interest rate is the decrease in inflation…

Let’s assume the most optimistic scenario for inflation. That is, let’s assume a scenario based entirely on official estimates. What are these estimates? Closing this year at 65% and closing 2024 at 33%. For this, it is necessary to remain at an average monthly increase of 3.3% in the last quarter of this year and 2.4% for the whole of 2024.

We looked at what the annual CPI increase would be by assuming these rates from above.

This year, we’re already closing it with 65%. In the first half of 2024, we can’t go below 50%. In fact, even at the end of July, there is an almost 50% rate (48.7%). If we consider today’s 40% interest rate, we won’t be talking about a positive real interest rate until the end of August 2024. Moreover, even in August 2024, there will be a rate that breaks even with inflation.

Furthermore, this inflation trend is the best case scenario. The rates we considered in the calculation are based on the government’s official estimates. Not even the government is expecting these rates to be met. If the actual rates are higher…

Is there another plan?

Since it is not expected to achieve a positive real interest rate through the rapid decrease of inflation, and there is no such prediction, there must be another plan! So, the government, which predicts that inflation will remain in the 40s until September 2024, must surely be making another plan. If such a plan exists, what is it? If there is such a plan, it can only be a significant increase in interest rates. Will the policy rate be raised significantly for this, or will another method be found?

Or, perhaps we are paying too much attention to Finance Minister Şimşek’s statement about approaching a positive real interest rate?”

OUR NOTE: Thanks to the author (Alaattin AKTAŞ) for publishing such an informative article on the issue.
Original source link: https://www.ekonomim.com/kose-yazisi/pozitif-reel-faize-ne-zaman-ulasabiliriz/711779