Possible scenarios for post-election interest rates in Türkiye

In America and Europe, banks that claimed to be practicing risk management have ended up in financial trouble. Banks do not purchase bonds to make profits, but rather to manage risks. Treasury bonds are theoretically considered a guaranteed and stable source of income due to their status as interest-bearing government debt. Holding bonds instead of cash not only offers convenience in buying and selling, but also provides collateral for borrowing. For these reasons, government bonds are widely accepted as a fundamental tool for risk management. However, recent events have shown that financial institutions holding bonds may not actually be managing risks, but instead, may be venturing into risky areas for little to no return, and ultimately suffering the consequences.

In reality, viewing interest rates as a risk management tool and relying on them to minimize risks is theoretically flawed, especially given the current state of the global monetary system and its inherent complexities. Although being caught between two conflicting situations is often referred to as a dilemma, it should be noted that today’s world is caught between two dilemmas, due to the U.S. dollar’s status as a reserve currency.

The first dilemma is a well-known concept that has been discussed in this column before: the Triffin Dilemma. This refers to the folly of a country with inflation printing reserve currency. In fact, it would be more accurate to say that capitalism itself is inherently inflationary. By the way, the act of a country printing its own reserve currency is a problem in and of itself.

The second dilemma is a new situation that has not yet been given a name in the literature. It can be described as a situation where a non-peaceful (polarizing, anti-globalization) economy prints its own reserve currency, or more accurately when an economy that has internalized its own monetary policy prints its own reserve currency. This is not just a theoretical dilemma, but an ontological one as well. (Even though a private company rather than the US government prints the dollar…) The creation of the world is based on the notion of an anonymous and non-inflationary value as a form of currency, as can be seen through the age-old function of valuable metals.

The notion of using interest rates as a risk management tool in a monetary system fraught with such dilemmas is a theoretical fallacy. It is akin to purchasing a ticket to a capitalist trap. The plan is to first employ interest-bearing instruments for risk management, then redirect monetary policy inward and increase interest rates in countries experiencing inflation. In this way, those managing risk will be drawn into risky areas and left exposed.

This outcome is deserved, because those who envision a world of interest-bearing instruments have wished ill upon themselves. But there is no need for distress. Capitalism is moving away from interest rates and towards gambling. I have expressed this many times before in this column.

Let me make a note of this as well: those who dream of a world of gambling are wishing for hell. Before capitalism enslaves everyone, we must use our heads.

Now let us turn to the current issue at hand: what will happen to interest rate policy after the election?

First of all, it should be known that an interest rate hike only benefits financial institutions forced to manage risk with interest-bearing instruments. The examples from around the world demonstrate that they too are doomed to failure; they will fail.

As for deposits, it is always better for clients to invest in capital market instruments such as portfolio funds.

The argument that an interest rate hike is necessary to relieve pressure on the exchange rate is baseless, and even behaviorally, it will not produce the desired result.

When calculating the exchange rate, a high value is produced without taking into account the inflationary inertia and the contribution of the exchange rate increase to inflation. In a previous article, I drew attention to this mistake. When adjusted for inflation base effects, the current exchange rate level will appear to be reasonable.
At this point, I would like to open a parenthesis for exporters. Exporters complain about not being able to fix prices. However, they may be experiencing problems because they are holding too tightly to the cliché of buying with dollars and selling with euros. If exporters realize that they have been buying and selling in TL for a long time, they can diversify their market strategies during this period.

On the other hand, raising interest rates is not beneficial for businesses. In fact, it does not benefit more than 90% of SMEs, which represent the majority of businesses in Türkiye. They benefit from selectively qualified loans at the best possible terms. Businesses should understand that relying on banks for working capital, which is an outdated habit, is not the right approach when there are additional investments to be made. They should prioritize working with banks when it comes to making these investments. There is a complete distortion in this regard in Türkiye, and this distortion has been corrected with selective loans, which has been good for banks. Otherwise, hundreds of thousands of businesses with debts equal to their turnover posed a risk to banks.

In short, raising interest rates will not have a positive impact on the exchange rate. On the contrary, behavioral pressure will be exerted on economic actors to lead them towards dollarization, and as a result, Türkiye may face significant problems. Raising interest rates will not contribute to the risk management of banks and other financial institutions. Although they do not have a bond portfolio large enough to be affected to a destructively large extent… Banks are profitable… Their only concern is that their customers do not turn to capital markets. However, such a shift, which they see as detrimental to them, is actually in the interest of their customers… Raising interest rates does not benefit businesses. Credit opportunities narrow. Banks focus on lending to large-scale firms, and SMEs cannot access credit. Large businesses also do not benefit from interest rate hikes. It is more beneficial for them to obtain funds from capital markets.

If you think that, on top of all this, after the elections, funds from Gulf countries that want to save their money from Switzerland, Germany, the UK, and the U.S. will turn to Türkiye under the current conditions, it can be said that raising interest rates will not be beneficial for Türkiye. Even those who have established an academic career by claiming that obtaining Gulf resources through the West was impossible have understood that Gulf resources come directly and without the need for interest rate hikes.

If a fair assessment is made despite those who have been hostile towards Türkiye for months in the name of the inevitability of raising interest rates, the pros and cons show that Türkiye’s interest rate policy is justified. There is no problem that it cannot solve at the point it has reached. Developments show that it would have been possible to raise interest rates from day one.

Now, I leave the interpretation up to you. If you were in a position where you could not benefit from raising interest rates after the elections, would you choose to put the Turkish economy in a difficult position?