Why rate cuts won't help

As I noted in my last column, almost all Turkey economists were expecting the Central Bank to cut its policy and borrowing rates at the Monetary Policy Committee rate-setting meeting on Feb. 24.

The Bank actually delivered more than expected by cutting not only those rates by 0.25 percentage points, but also its overnight lending rate by 0.50 percentage points. Of the 24 economists surveyed by business channel CNBC-e, only four were expecting a cut of 0.50 percentage points or more in that rate.

I concluded my column by noting that I?d be very curious to read how the Central Bank justified the rate cuts. At their regular meeting with economists on Feb. 25, officials from the Bank emphasized that policies were having ?a favorable impact of inflation, especially inflation excluding energy and food [core inflation indicators] and inflation expectations.?

Except that they aren?t! The Bank?s favorite measure of core inflation has fallen only modestly, and at 8.63 percent, it is significantly above Governor Erdem Ba?ç??s 5 percent threshold, above which he wasn?t supposed to conclude that the inflation outlook has improved. Similarly, the recent fall in inflation expectations seems to have slowed down. In any case, expectations are still considerably higher than the Bank?s 5 percent inflation target.

As you probably know, food prices rose a lot in February. Annual inflation could even end up increasing when official figures are released on March 3. Incidentally, the Bank dropped the reference to inflation falling toward the Bank?s 5 percent target by mid-year from the one-pager accompanying the rate decision.

So if the Bank is not as confident on disinflation, why did it cut rates? Because of the pressure...