Real Interest Rates in Turkey

Real interest rates in Turkey had been in double digits for the past 20 years. However, since last year interest rates have been going down unexpectedly. Currently trailing 12-month inflation rate is above 10%, but the short term interest rates are at 6.5% and 2-year interest rates are at 9%. Inflation in 2010 is expected to be around 8%, so the current real interest rates in Turkey are uncharacteristically negative. If you have told anyone a year ago that real interest rates in Turkey will be one of the lowest in the entire world, nobody would believe.

Why does Central Bank of Turkey keep short term interest rates so low even though the inflation rate reached 10% and the economy has been growing at around 10% rate? Governers of central bank mistakenly believe that consumer sentiment is low, growth rate is low and core inflation determines the fate of inflation rate in Turkey. First of all, official statistics use a trailing 12 month average growth rate as the current quarters GDP growth rate. So until two days ago, that statistic showed a GDP growth rate of -2.9%. Meanwhile the quarter-over-quarter growth rate was 2.7% (an annualized GDP growth rate of 11.2%). That was the first time State Statistics Institute announced seasonally adjusted Q-o-Q growth rates. It did not get any media coverage though and most of the people were still thinking that the economy was still in recession.

Two days ago State Statistics Institute announced a 6% year-over-year and 2.3% quarter-over-quarter GDP growth rate which implies a nearly 10% annualized growth rate for the last quarter of 2009. Since they are still using the year-over-year growth rates as their benchmark, it is now certain that they will announce a 13-14% year-over-year growth rate for the first quarter of 2010. This growth rate is even larger than stimulus induced growth rate of China!!! Yet the central bank still insists on an extremely accomodative interest rate policy. Another factor affecting this decision is the high unemployment rate and their preference for higher growth rates over lower inflation rates. The puzzle is why the markets let the medium term interest rates stay low.

In the next few months, I believe the core inflation rate will accelerate until the central bank starts to tighten the interest rates. As a result investors opting for government bonds will experience negative real yields, Turkey's GDP growth rate for 2010 will be 8% (as I stated yesterday market expectations are around 5%, which is extremely low, they don’t know what they are doing) and the stock market will be in record territory.

Here is a list of related articles in Turkish about real interest rates in Turkey:

Türkiye'de Enflasyon ve Reel Faiz Oranı
Dünyanın En Düşük Reel Faizi Türkiye’de

3 Yorum Var.:

Hüseyin MEÇO dedi ki...

sayın editör,

türkçeden başka dil bilmeyene bilgilerinizi esirgiyorsunuz.

türkçe lütfen.

arz ederim.

rourkie dedi ki...

There are compelling reasons to advance the hikes: expectations are deteriorating, and most emerging markets have either begun, or are about to begin, rate-hike cycles. We’ve done a very simple time-series analysis, which should be some cause for concern too, if the past is any guide. We found that variance in headline inflation helps explain the variance in core inflation, which in turn helps to explain inflation expectations. This precedence structure is exactly what we do not want, because it suggests inflation expectations may keep worsening in the coming months, as the headline and core indicators deteriorate. All these call for the Bank to act promptly and decisively, perhaps earlier than the consensus, while we are still in the early stages of this dynamic. From a broader perspective, it is hard to endorse negative real policy rates in a country that has never truly anchored inflation expectations. Also recall that the Bank has made some controversial moves in the past, like upwardly revising the inflation target and accommodating fiscal laxity for too long. Our impression is that its dovish bias has also been noted by the markets. Given this mixed credibility record, then, one would have to act swiftly to prevent deteriorations in the pricing behavior.

Paragraph above is taken from one of our latest report. What I want to say here is that in Turkey inflation does not converge to the core in the long run, on the contrary, headline inflation mostly drives the core.

Kubilay dedi ki...

Bu yazi altin degerinde.