CBRT: Emphasis on macroprudential measures in an environment where rates do not change


The Central Bank of the Republic of Turkey kept interest rates constant for the fourth time in a row. The monetary policy committee kept the one-week repo rate at 14%, in line with the consensus estimates of economists. In the current perspective of the central bank, we see that the non-conventional plane is maintained because the economic management’s targets for growth, not proactive against inflation. At this point, steps not taken according to economic indicators may increase the risks of inflation and current account deficit, disrupt the selectivity in the credit mechanism, and widening the interest rate difference of the lira with other markets may increase the rate of erosion.

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

The one-week repo rate remained unchanged at 14%. All 17 economists in the Bloomberg poll were expecting 14%.

The central bank said the committee decided to “strengthen its macro-prudential policy set”, citing strong growth, risks to the current account deficit, and the need for growth in long-term investment loans.

While the share of sustainable components of economic growth is increasing, the risks on the current account balance stemming from energy prices continue.

In the recent rise in inflation; The increase in energy costs caused by geopolitical developments, the temporary effects of price formations far from economic fundamentals and the strong negative supply shocks caused by the increases in global energy, food and agricultural commodity prices continue to be influential.

With the re-establishment of the global peace environment and the elimination of base effects in inflation, the downward trend in inflation will begin.

Comprehensive review of the policy framework continues to promote sustained and strengthened liraization.

Turkey has for some time transferred the business of supporting the currency from monetary policy instruments to non-conventional instruments. In an environment where the reference to the current account balance will be subject to very high adverse effects, the stability of the lira is based on foreign currency inflows and non-standard measures that plan to encourage lira investment. As a result of the desire of the economy administration to maintain the growth at a high level before the upcoming 2023 elections, and the CBRT’s refusal to raise interest rates for a while, inflation increased while the policy rate remained constant. Increasing interest rates is a policy course adopted by central banks outside of Turkey under normal circumstances. However, the fight against inflation and compliance with capital movements are desired to be carried out with a different approach, not interest rates in Turkey.

Inflation has reached the level of 61.1% as of March, and as price increases accelerate, the difference between borrowing costs and borrowing costs will increase, increasing the pressure on the lira. Rising energy and food costs will mean higher consumer prices for longer. And rising US interest rates could put more pressure on the lira. The central bank continues to refer to the expansionary level of global monetary policies. Of course, there are central banks that continue to buy assets, but less assets are now being bought. In fact, the US Federal Reserve ended its asset purchases and started to increase interest rates. Many central banks are also raising interest rates, so the direction of general global monetary policies is tightening. In the current situation, as inflation and interest rates abroad continue to increase, the difference in real interest rates will also increase, and Turkey currently has the lowest real interest rate in emerging markets.

At this point, the central bank, together with the economy management, primarily evaluates the impact of commodity and food prices abroad on current price increases. In the current course of the Turkish economy, on the other hand, these effects are added by the loose financing conditions at home and the demand movements related to the deteriorating inflation expectations and the depreciation of the lira, which increases the pass-through rate to consumer prices. In the reference to inflation, it is seen that the Central Bank gave weight to the factors that it considered as exogenous and temporary in the previous meeting, and attributed the inflation decline setup to these factors, which it described as “temporary”, and to the expected base effect.

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