The Central Bank of the Republic of Turkey kept interest rates constant in its third meeting in a row. The monetary policy committee did not change the 1-week repo rate at 14%, in line with all expectations. Recently, we have been drawing attention to the fact that the Central Bank is not in a position to take inflation into account while determining interest rates due to the perspective change. While many indicators reveal the orthodox policy requirements in line with inflation and exchange rate spiral risks, we have not formed our expectations from the Central Bank according to the indicators, but according to the signals of the Bank and the economy management. Accordingly, the desire to progress towards achieving the economic growth targets causes the Central Bank to keep the interest rates quite low.

 

 

Comparison of Turkey CPI, policy rate and inflation targeting… Source: Bloomberg

Highlights from the Central Bank's decision and policy text;

The one-week repo rate remained unchanged at 14%. All 21 economists in the Bloomberg poll were expecting 14%.

Domestic economic activity remains strong with the help of strong foreign demand, although some regional differences have emerged.

Risks on the current account balance stemming from energy prices are closely monitored.

Sustainable current account balance is important for price stability. In the February MPC statement, it was predicted that the annual current account balance would turn into a surplus.

Loan growth, including long-term investment loans, and the targeted use of the funds reached for real economic activity are important for financial stability.

The recent increase in inflation stemmed from supply-side factors such as increased energy costs as a result of escalating regional conflicts, temporary effects of price formations that are not supported by economic fundamentals, and the increase in global energy, food and agricultural commodities.

The Committee expects the disinflation process to begin with the measures taken for sustainable prices and financial stability, as well as the decline in inflation due to the base effect and the resolution of the ongoing regional conflict.

A comprehensive review of the policy framework is underway to promote permanent and strengthened liraization in all policy instruments of the central bank.

It is an important detail that the references to the current account surplus phenomenon have been withdrawn in the Central Bank's statement. This year, we will be heavily exposed to the effects of the increase in energy prices due to the Russian crisis on the import bill. Ultimately, Russia's invasion of Ukraine will likely result in a weaker currency, higher energy costs and higher food prices. Although our calculations show that every $10 movement in oil causes an effect of 4.5 billion dollars on the current account deficit, this difference between the assumption of an average oil price of 80 dollars and the assumption of an average oil price of 110 dollars corresponds to an amount of approximately 13-15 billion dollars. When we add the impact on natural gas and input costs, we can close the year with a current account deficit of $50 billion, with the decreasing contribution of net exports and a loss of approximately $3.5-4 billion from tourism. Considering that the current account balance target is no longer valid, we think that it will be necessary to calculate the risks regarding price stability.

Turkey's economic indicators, especially inflation, make it necessary to increase interest rates. The rapid rate cuts made by the CBRT in a very early and immature period were also effective in the rapid depreciation of the lira and the ignition of inflation in the same period. Considering the inflation reaching 54.4% and the policy rate of 14%, the concept of the lowest negative real interest rate among emerging and emerging markets is not sustainable. However, we think that the Central Bank does not consider such indicators as the main determinant, and we see that the government has determined a perspective towards its economic targets and is proceeding on this path. Therefore, we are not expecting a rate hike in 2022, the year before the 2023 elections, under the following conditions.

The deterioration in inflation expectations, on the other hand, shows more and more reflections with each passing month. The apparent deterioration in the inflation path may cause the course of the year to be above 60% after the Russian crisis. In the Market Participants Survey, professionals' forecasts were that the CBRT would not change rates in the near future, but that interest rates could be higher in later maturities. We can predict that the market will weigh on the challenging conditions with effects such as tightening financial conditions, high inflation and ever-increasing exchange rate. The Ukraine-Russia war and subsequent exchange rate volatility are examples. In the periodic exchange rate volatility, the FX-linked deposit element and its financial burden come into play. The exchange rate, which is 14.77 as of today, reveals a figure of approximately 28 billion TRY (approximately 2 billion dollars) loaded on FX-linked deposit. We think that the FX-linked deposit product will be supported in terms of price stability within the scope of the liraization strategy in the future, and additional facilitating principles may be introduced to increase foreign exchange conversions.

The next meeting of the Central Bank will take place on April 14. We do not have any expectations regarding interest in the near term. As for inflation, we think that the high course of the current course will continue until the end of the year and that there are upside risks depending on the war conditions. Our year-end inflation expectation is 46.2%.

Kaynak: Tera Yatırım
Hibya Haber Ajansı