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    Who is this interest-rate-lobby?

    Fatih Özatay, PhD11 June 2013 - Okunma Sayısı: 1007

    I was just about to give up when I got a flash: instead of asking who would most benefit from high interest rate, I turned to the powers that push up Turkey’s riskiness.

    On Sunday I decided to write about the “interest rate lobby” debate. Then I backed; I thought that people would ask why I felt such urge and suddenly I would find myself in deep trouble. But friends from the Radikal called me and asked if I could write a commentary explaining what this interest rate lobby was. How about that! I said yes as this was their only request in years. Anyways, here it is.

    To begin with, I had to make an assumption and background research on the ambitions of the “interest rate lobby.” Did they want interest rates up or down? Since there is a general perception that interest rate going down is something good, I decided to assume that it was a high-interest-rate-lobby. Then I reconsidered my position. Have I ever declared that I want interest rates to increase? With a quick search I took fright: in the last couple of months I have repeated that keeping interest rates below inflation would make the economy more vulnerable by pushing up consumption and hence disturbing the current account balance. Then I decided I could be cleared off any accusations since I was concerned about economic vulnerabilities at the end of the day.

    But what if I could not? On top of that, I used to be the vice governor of the Central Bank of Turkey. I immediately checked the Bank’s interest rate decisions back then and saw that during my term at the office (16 May 2001-3 April 2006) policy rate decreased from 70 to 13.5 percent. During this time frame, the rate was cut 33 times and increased only once in July 2001. Then I breathed a sigh of relief. But I thought I might be accused of keeping the rate higher than necessary. I had two counter-arguments: First, in that period average growth rate was 7 percent, considerably above the potential. Second, in the four-month period following the date I left the office, the policy rate was raised to 17.5 percent. Then, the rate was not high during my term at the office. Can I shake off the accusations? Not sure. But I am pretty sure of the answer to the question “who is this interest rate lobby?” Not me!

    As a next step I decided to gear up to technical details: Might this lobby be composed of savers, that is, people who invest in bonds and securities? Not likely, since any rise in interest rate would lower the price of bonds and securities. Why would people want their wealth to decrease? How about real estate owners? After all, real estate prices will not increase just because interest rates do. Besides, who would take a loan on high interest to buy real estate? Lobbying to raise interest rates is not a concern for depositors of commercial or participation banks either since their funds are already tied to an investment. Anyway, long story short, any hike in the rates would be of interest for people who have liquidity at hand only.

    How about banks? After a quick analysis, I decided that interest hikes would not be good for banks either. Deposits are shorter-tem than loans and high interest would bring losses to banks during renewal. Moreover, the fall in bond prices reduces the total value of bank assets. Also, the hike in interest rates might increase the corporate sector non-performing loan rate pushing banks further into trouble. How about the corporate sector? Evidently high interest rate does not work for them which will not only push up loan costs but also reduce turnovers due to weaker demand.

    Of course the exchange rate dimension also should be assessed. To be frank, if market rates in Turkey increase without any intervention by the Central Bank to increase policy rates or somehow push up the cost of loans, it is either because of a rate hike in developed countries or a rise in risk perception towards Turkey. Evidently, both of the factors push up exchange rates.

    I think I finally have an answer: the distinguished members of the interest-rate-lobby might be those who hold liquid FX and gold investors. Those who have liquidity to be used for financial investments too might be added on the list. But, wait a second: this refers to a large number of people of different political positions. Why would the supporters of the party in power want to lobby to overthrow the party they support? And, power changes hands only with the ballot box, isn’t it?

    I was just about to give up when I got a flash: instead of asking who would most benefit from high interest rate, I turned to the powers that push up Turkey’s riskiness. Lately, interest and exchange rate hikes in Turkey have been much stronger than those in other emerging markets, right? That means Turkey is much more risky now. Who has driven this movement? Who have pushed interest rates up? I guess I am sailing close to the wind so let me stop here!

    This commentary was published in Radikal daily on 11.06.2013