OPINION: CBRT faces a tough choice in today’s MPC

In this video from the “Pusula” series on the Mesele Ekonomi channel, analysts Murat Aysan and Ömer Gencal discuss the recent geopolitical tensions between the US and Iran and their profound implications for the Turkish economy. A primary focus of the discussion is the anticipated behavior and policy tools of the Central Bank of the Republic of Turkey (TCMB) in response to rising inflation and market volatility.

The Economic Impact of Geopolitical Tensions

The program begins by addressing the tragic events in the Middle East and the resulting spike in oil prices. The analysts note that oil, which had been around $65, surged toward $120 in Far East markets before stabilizing in the $90s. This volatility directly challenges the TCMB’s year-end assumptions, which were originally based on an average oil price of approximately $61.

The analysts point out a divergence in impacts: while high energy prices are inflationary and damaging to the current account deficit, the resulting slowdown in economic growth might provide a counter-inflationary effect.

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TCMB Policy Views and Interest Rate Expectations

The core of the discussion revolves around the TCMB’s upcoming interest rate decision. The analysts highlight that while the official policy rate may sit at 37%, the “effective” or practical rate has already moved toward 40% due to the bank’s liquidity withdrawal and the cancellation of one-week repo auctions.

Key takeaways regarding the TCMB include:

• The “Stay and Watch” vs. Radical Action: There is a debate on whether the bank will maintain its current complex set of tools or move toward a radical change. Murat Aysan assigns a 70% probability to the TCMB making a radical move, specifically a formal interest rate hike, to signal its commitment to price stability.

• Liquidity Management: The bank has been active in “sterile” interventions, including selling approximately $12 billion in foreign exchange over a four-day period to stabilize the Lira. The analysts suggest that if total sales reach the $35-40 billion mark by the end of the week, it would signal a more alarming trend for reserves.

• Inflation Targets: Despite previous hints at a possible 100 basis point cut in March, the analysts agree that the current “war footing” of the global economy has rendered such plans obsolete. The TCMB is now expected to either “pass” (keep rates steady) or hike to protect the Lira.

• Bond Market Volatility: Significant selling in the bond market has pushed two-year yields toward 40% and ten-year yields to 32-35%. The TCMB’s recent purchase of 100 billion TL in bonds was a move to provide liquidity, though the analysts question the timing of certain specific bond types purchased.

Budgetary Developments

The analysts provide a positive update on the fiscal side, noting a marked improvement in the budget. Revenues increased by 68% in the January-February period, while expenses rose by only 37%. This suggests that fiscal policy is finally beginning to support the TCMB’s monetary tightening efforts, a coordination that had been missing in previous months.

Conclusion

The overall sentiment is one of “calculated caution.” The analysts believe the TCMB will prioritize financial stability over growth in the immediate term. While the external shocks are significant, they argue that as long as foreign exchange interventions remain within manageable limits (below $35 billion), the systemic risk remains contained.