This is a quick analysis by Atilla Yesilada about the importance of Central Bank’s (CBRT) large rate hike.
CBRT did not disappoint the market, while adding reality to the new economic policy story with a second 500 basis point rate hike.
Gaye Erkan and his teammates increased the policy rate by another 500 basis points, breaking many popular perceptions among economists and the market about Erdogan setting a ceiling on monetary tightening. In the MPC statement, we see both realistic diagnoses of the problem and we now believe the following paragraph:
“The policy rate will be determined to provide monetary and financial conditions that will reduce the main trend of inflation to the 5 percent target in the medium term. Monetary tightening will be gradually strengthened when and to the extent necessary until a significant improvement in the inflation outlook is achieved….
Indicators regarding inflation and its main trend will be closely monitored and the Board will continue to use all the tools at its disposal with determination in line with the main goal of price stability.
“The Board will continue to make its decisions in a predictable, data-driven and transparent framework.”
In the next few days, a loud debate will ensue about the extent of monetary tightening going forward. While we reserve the right to change our forecast in the future, we suggest that it is reasonable –as intermediate target– to raise the policy rate to 44%, which is the end-2024 expectation in CBRT’s monthly survey.
Already, before the MPC meeting, international investment banks were revising their end-2023-2024 policy rate targets to 32-40%. Now, 50% will be discussed by the end of 2024.
Let’s summarize the importance of this decision as follows:
- The perception that Erdoğan set certain upper limits on interest rates has collapsed. From now on, we will make policy rate predictions based on our inflation expectations.
- 30% interest naturally does not solve the inflation problem, but when considered together with credit restrictions, it at least prevents it from going higher.
- With the increase in deposit and loan interest rates by AT LEAST 500 basis points in the coming days, it became easier for the funds to be released from KKM (FX protected deposit scheme) to be converted into TL.
- Erdoğan now has “goods” to sell in his meetings with businesspeople and Şimşek with fund managers and banks. The story is that monetary policy tends towards rationality. CBRT decision means that financial investments entering Turkey in the coming months will exceed expectations.
- The era of easy profits in the stock market is over, we expect price increases in the housing market to slow down noticeably.
- Gaye Erkan converted the political opportunity Erdoğan missed in New York (with his hawkish statements) into a score.
- Turkey is now in a brand-new monetary regime.
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