CBRT: Monetary policy decision in the concept of lira volatility


We do not expect a change in interest rates at the monetary policy meeting of the Central Bank of the Republic of Turkey, which will be held tomorrow. We think that we are in a situation assessment period in terms of market and macroeconomic developments after the MPC announcement in December, which highlighted the end of the easing cycle. In the last concept; After the CBRT signaled the end of the easing cycle in December, the prevailing theme was the fact that the lira remained fragile and inflation remained out of control. The expected increase in inflation in the coming months will cause interest rates to remain at very divergent points.


Following the 500 basis point rate cut in four consecutive meetings, the central bank announced in December that it had completed the existing “limited room” for easing. The bank also stated that they will monitor the effect of the easing cycle in 1Q22. Turkey’s wide real yield gap, the worst among emerging market peers, is putting pressure on the currency as the developed world’s central banks prepare to tighten monetary policy to contain inflation. At this point, the aggressive tightening cycle expected from the Fed due to high inflation causes bond yields to rise in the US. We consider the capital outflow effect that this situation will have on developing countries in general, as a factor that may expose Turkey to additional fragility due to the deep interest rate gap. This may not help price stability in terms of exchange rate levels and volatility, and may delay the dampening of the warming effect of inflation.


President Mr. Recep Tayyip Erdogan said borrowing costs would fall “slowly, gradually and without haste”. Minister of Treasury and Finance, Mr. Nureddin Nebati also evaluated that the next three months should be seen in the decisions of the Central bank. Despite the 4-month easing cycle of the central bank, market-based interest rates continue their upward trend. In other words; While interest rates associated with central bank funding are falling, market and bank-based rates are rising. This does not put the current easing policy on a sustainable basis and does not provide the intended financial easing.


The easing policy at the end of last year sparked a violent reaction in the foreign exchange market. The lira fell 44% against the dollar in 2021, the sharpest drop among major emerging markets. In terms of the de-dollarization phenomenon, the impact of financial products, especially the currency-protected deposits that have been introduced recently, may be limited due to the fact that the factors related to the actual risks of lira assets have not disappeared. We find it appropriate to evaluate the main issue through the main factors and policies that depreciate the lira. The central bank may want to avoid triggering another lira runaway with further rate cuts. We think that almost all of the loosening done so far has been front-loaded. Therefore, we do not expect the CBRT to make any changes in interest rates tomorrow. However, we do not foresee any monetary tightening in the upcoming period against rising inflation, based on heterodox policy implementation and economy management, apart from the market approach adopted by the global financial system. In other words, the main ground of monetary and fiscal policies may continue to remain lax in the realization of growth targets. For now, we see that the probability of transitioning to more orthodox policies is low.

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