Repetition of tight policy commitment


Speaking at the economist presentation meeting organized by the CBRT, Governor Mr. Şahap Kavcıoğlu reiterated his commitment to keep the policy rate above inflation until a permanent decline in price increases. Kavcıoğlu reiterated the central bank’s expectation that inflation will fall significantly from the end of 3Q21 and the beginning of 4Q21. Kavcıoğlu noted that vaccine studies have positively affected economic activity and the current account balance has started to improve.


The topics covered in the presentation and our own comments on them;


The predictions to be made by the Central Bank on the risks related to the inflation outlook were a matter of curiosity, especially in light of the new conditions that will arise from the spillover effect of the electricity and natural gas hikes. In this context, we think that the CBRT’s path forecast for April should be updated upwards in the Inflation Report at the end of July and converge to the newly formed market-based inflation forecasts. Despite the fluctuations in inflation, mainly due to the effect of imported prices and oil prices, as well as the effect of administered prices; It seems that the Central Bank did not feel the need to change the current forecasting path. Regarding this; It is stated that there may be periodic fluctuations, but monthly realizations do not detract from the year-end forecasting route. In other words; they stick to the same outlook despite recent price hikes, including energy.


While keeping the interest rates constant in June, the Central Bank has to establish an equation with inflation risks on the one hand and the new balances created by the tightening trend in global financial conditions. At this point, the degree of tightness of monetary policy and the range of the required policy reaction are important. Inflation still points to a significant uncertainty, and the risk premium factor is also decisive for our real interest rate standard. Therefore, In addition to the “interest over actual and expected inflation” commitment, which Mr. Kavcıoğlu insists on, the question of how much our real interest should be is based on very rational grounds. If we eliminate the fractional effect created by periodic fluctuations in inflation, it is obvious that although our real interest rate, which is roughly 2%, is higher than other peer countries, exchange rate stabilization has not been achieved and this situation does not help inflation. The Central Bank thinks that factors such as macro developments, tourism, export developments and tight stance will reflect positively on the exchange rate. When asked whether current inflation will require a new rate hike, Mr. Kavcıoğlu said, “The next road does not show us this. Maybe there will be an increase in inflation in July, but we expect a decrease after that; If there is a surprise in inflation, whatever decision this development requires, we will take it in the MPC.”


The subject of macroprudential measures and RR change also came to the fore in the presentation. Kavcıoğlu, who does not find it correct to evaluate RRs as an alternative tool to an interest policy; He thinks that the regulations made in this context should be evaluated through regulating the monetary transmission mechanism. While evaluating RRs as auxiliary instruments in the current policy plane, not instead of interest; He stated that there is absolutely no situation that the measures to ensure the return from FX deposits to TRY were taken because the interests could not be increased. Basic function; Increasing TRY reputation, facilitating balance sheet management and increasing TRY weights in bank balance sheets. At the same time, with the additional advantage offered by making TRY deposit weight attractive over RR remuneration, the benefit from more TRY deposits was a topic that we focused heavily on in our comment on the RR regulation that we published yesterday.


Regarding macro-prudential measures; It is stated that the general course of loans, excluding individual loans, is progressing in line with the tight monetary policy, therefore measures are not currently being considered, especially on the commercial loans side. There was no clear picture of swap agreements. There may be new agreements with some central banks, close to being agreed. Gross reserves are also an objective, but the main functionality is seen as developing trade in local currency, especially with countries with which we run a trade deficit. Our net reserve position, excluding swaps and domestic liabilities, still requires us to be cautious. Buying foreign currency can also be seen as an option, and this will have to be done gradually without disturbing the market functioning and the supply-demand balance. The good course of tourism revenues and exports can form a basis for better projections, at least in terms of balance of payments, and the effect of foreign exchange inflows will be important in terms of reserve utilization in financing.


Although we do not expect a rate cut in the 14 July MPC, we underline that the policy details that refer to the monetary stance will still be important, and we state that inflation risks should be closely monitored.

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