CBRT: As the policy rate reaches single digits alternative tools are loading

The CBRT lowered the policy rate from 10.5% to 9% with another 150 bps rate cut. This move was in line with the forecasts of almost all economists, as the CBRT had indicated another similar cut to the October MPC in its previous monetary policy statement. MPC stated in its policy statement that 'the current policy rate is sufficient and it has decided to end the rate cut cycle that started in August'. In addition, the Central Bank's policy text references that alternative instruments will be used in the future to minimize the interaction on the lira and inflation.

If we look at the highlights of the CBRT's policy statement;

-The one-week repo rate has been reduced to 9% (estimate is 9%).

-MPC decided to end the interest rate cut cycle that started in August, considering that the current policy rate is sufficient.

-It is observed that central banks continue their efforts to develop new supportive measures and tools to cope with the increasing uncertainties in financial markets.

-Leading indicators for the second half of the year continue to point to a slowdown in growth due to weakening foreign demand.

-The CBRT will implement additional measures, and the set of policies to be implemented will be published in the “2023 Monetary and Exchange Rate Policy” text to be published in December.

-The high course of energy prices and the possibility of recession in the main trading partners keep the risks on the current account balance alive.

-The effects of slowing foreign demand on aggregate demand conditions and production are closely monitored.

-On the rise in inflation; The delayed and indirect effects of energy cost increases caused by geopolitical developments, the effects of price formations far from economic fundamentals, and strong negative supply shocks caused by increases in global energy, food and agricultural commodity prices continue to be influential.

-Supporting financial conditions, maintaining the momentum in industrial production and the upward trend in employment, are critical for the sustainability of structural gains in supply and investment capacity at a time when uncertainties regarding global growth and geopolitical risks increase.

Thus, in the 2022 model monetary policy easing, the cycle after August 2022 reached a total size of 500 bps. In the 2021 model version of the same cycle, the lira was subject to a significant depreciation effect, with inflation several times higher than targets within a few months and an ongoing upward trend. Layered with global pressures, inflation reached a 24-year high of 85.5% with October 2022 data and probably peaked. Of course, this is almost 17 times the target of the Central Bank in the broad perspective, and with the latest interest rate cut decision, the policy rate adjusted for inflation is 76.5%, the lowest level among developing countries.

Turkey's real returns dive even deeper… Source: Bloomberg, Tera Yatırım

The -76.5% real interest position, which should pose a serious problem on the lira under normal conditions, seems to not deteriorate the status quo in the exchange rate. In other words, unlike the similar 500 bps discount cycle in 2021, a marginal lira depreciation will probably not be seen in the current conditions. The bank explains the situation with a forward-looking reference to the use of alternative instruments and reveals that the perspective of the plan against the lira/inflation cycle will be driven by alternative instruments, not monetary policy. We do not expect any policy perspective return, as monetary and fiscal policies will be loose before the elections. We express the reservation that this situation may trigger periodic price volatility and lead to an upward trend in inflation once the base effect is erased. We consider that the main trend, price rigidity, demand asymmetry, expectation channel and inertia will be the subject of inflation after the base effect reduces inflation to the 40-50% band towards the middle of 2023. In this period, we think that the way to manage the relevant factors is through an inflation-oriented policy approach.

On the other hand, we think that the future value and volatility indicators of the lira are slippery. This year, the lira has lost 28.6% of its value. These levels may continue to be maintained, as the central bank and economic authorities are active on measures to reduce the demand for foreign currency, primarily reserve buffers, to keep lira levels stable. We will look at how long this has been effective when we consider issues such as standardization of reserve adequacy measures and the continuity of external financing.

Comparison of inflation and dollar/TL rate Source: Bloomberg, TURKSTAT, CBRT, Tera Yatırım

Since there is a clear forward-looking message in the MPC text, we understand that this action is the last rate cut for now. In the current conditions, it is stated that the policy rate is at a sufficient level in the evaluation of dynamics such as the global outlook, domestic inflation and financial stability. On the other hand, it is referred that additional measures may be taken by the Central Bank. As it is known, while the interest rates were reduced, restrictive measures were taken to ensure that the loans were transferred to the desired target areas in a way that would contribute to the economic activity. In order to support the liraization, measures such as collateral, security establishment and required reserve policies are taken. It seems that measures similar to the previous ones may continue to come. In this context, the Central Bank will determine the details of the upcoming period on the instruments intended to increase the efficiency of the monetary transmission mechanism in the text of the “2023 Monetary and Exchange Rate Policy” to be announced in December. In this period, when interest rates will be put on hold for a while, we expect alternative instruments to be active and fine-tuning to continue.

The next MPC meeting will be held on 22 December. From the clear reference given at this meeting, we understand that the policy rate will be kept constant at 9% in the MPC meeting to be held next month. It is understood that monetary policy will continue in an unconventional trend between the economic perspective of the government and the factors of inflation and global monetary tightening.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı