CBRT: Interest rates

We expect the Central Bank to keep the one-week repo rate at 8.5%, avoiding making any changes before the second round of elections. In a concept where inflation is 43.7%, the pressure on the lira arising from the loose policy stance will be reduced through banking regulations and practices, as seen in the last period, as well as after the election. In the current political and economic conjuncture, this approach is expected to continue. However, we are not on the verge of making future projections for the interest rate policy, as there is uncertainty about how the second round of voting will turn out.

In this policy practice, loose monetary policy and expansionary fiscal policy fuel increases in consumer prices. Overall, inflation is expected to remain high despite some improvements and slight decreases in inflation expectations, according to market participants. The monetary policy of the central bank, characterized by negative real interest rates, is expected to continue even if the gap between inflation and interest rates closes. The verbal guidance of the CBRT and the current economic management reveal the expectations that interest rates will remain low in the current monetary policy perspective. Depending on the election results, there may be important updates in the future interest rate expectations.

The course of CBRT Inflation Report forecast updates and year-end inflation rate comparison… Source: CBRT, TURKSTAT, Dinamik Yatırım

Within the framework of all these assumptions and variables, the current base effect in inflation will disappear after June and it will be very difficult to decrease after that. Although the inflation rate we foresee for the end of the year is 44.5%, this is well above the official forecast of the Central Bank of 22.3%.

The CBRT meeting will be held three days before the second round of the presidential elections to be held on 28 May. Although President Mr. Recep Tayyip Erdogan was ahead by a narrow margin in the first round, he failed to secure the necessary majority to win. Erdogan's victory will continue to aim at low interest rates, as he has recently stated. On the other hand, the conditions that may force the CBRT to change the policy of the exchange rate, reserves and inflation will also be monitored. If Mr. Kemal Kılı?daroğlu wins, interest rate increases will gradually spread over months with a rapid transition to Orthodox policy.

Orthodox policies seem necessary to reduce inflation within the framework of the economy's threshold of being exposed to significant fragilities within the concept of 43.7% inflation and negative real interest rates. The growth orientation on which the new economy perspective is based does not make it possible to increase interest rates. Whether CBRT policies will evolve will depend entirely on the election results.

?Kaynak: Dinamik Yatırım- Enver Erkan