In the first meeting chaired by Naci Ağbal, the Central Bank raised the policy rate by 475 basis points to 15 percent in line with market expectations. Simplifying the funding composition, the Central Bank announced that the weekly repo will now be the main policy instrument.
The Monetary Policy Committee (MPC) of the Central Bank of the Republic of Turkey (CBRT) raised the policy rate from 10.25 percent to 15 percent. The rate hike came in line with market expectations. Meanwhile, the ‘simplification’ step, another expectation of the markets, was also taken. The Central Bank announced that funding will be made through the one-week repo rate, which is the main policy tool, and that this interest rate will be the only indicator for the monetary stance.
With the decision, the dollar/TL fell to 7.50 as the first reaction, while the euro/TL fell to 8.90 liras. Minutes before the announcement, dollar/TL was at 7.70; euro/TL was at 9.15. The dollar / TL, which rose after the first reaction, is trying to stabilize just above 7.60.
Reasons for a ‘clear and strong monetary tightening’
In the announcement released after the MPC meeting, it was stated that the global economy showed a partial recovery in the third quarter, but uncertainties regarding the global economy in the upcoming period have increased due to the recent increase in COVID-19 cases.
In the announcement, which noted that the recovery in economic activity continued, the following assessments were made:
“The partial restrictions imposed due to the increasing number of cases increase uncertainties about the short-term outlook of economic activity, especially in the services sector. On the other hand, domestic demand, which increased with the lagged effects of the strong credit momentum provided during the pandemic period, adversely affects the current account balance through the import channel.
The lagged effects of the depreciation in the Turkish lira, the rise in international food prices and the deterioration in inflation expectations have an adverse impact on the inflation outlook. Although the data monitored for November point to an increase in inflation driven by the recent exchange rate volatility, this increase is expected to be temporary given the decisive monetary policy stance.
Accordingly, the Committee decided to implement a clear and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process as soon as possible.
In the upcoming period, the tight monetary stance will be maintained decisively, taking into account all factors affecting inflation, until a permanent fall in inflation is achieved.”
Policy rate will be the only indicator
The announcement stated that the permanent establishment of a low inflation environment will positively affect macroeconomic and financial stability through a decline in country risk premiums, reversal of the dollarization trend, an upward trend in foreign exchange reserves and a permanent decline in financing costs.
It was emphasized in the announcement that the Central Bank will achieve its main objective of achieving and maintaining price stability by applying the principles of transparency, predictability and accountability required by the inflation targeting regime, “In light of these principles, Central Bank funding will be made through the one-week repo rate, which is the main policy instrument, and this interest rate will be the only indicator for the monetary stance.”
In the announcement, it was emphasized that any new data and news to be announced may cause the MPC to change its policy stance for the future, and the summary of the meeting will be published within five business days.
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By raising the policy rate, the Central Bank adapted to market conditions, strengthened its real interest rate position and increased predictability by directing all funding to a single rate. Previously, the Central Bank had used the late liquidity window as a main policy tool, increasing its weight in daily funding. Except for the September MPC meeting, the Central Bank did not make an official policy rate hike, increasing the cost of TRY funding by directing banks to the highest lending rate, the LLW, by cutting or closing cheap funding channels. Although the 475 basis point rate hike may seem like a dramatic increase, in practice it only represents a 20 basis point rate hike, as the TRY funding rate announced as of November 18 was 14.80%. However, since TRY funding, which was previously directed to different channels, will be shaped around the repo rate, the funding composition will not change frequently and at high intervals on a daily basis. This will increase the predictability of the Central Bank’s policy and ensure that policy moves achieve their objectives.
With the policy rate hike, the real interest rate position was also formalized. October inflation rate was realized as 11.9%, while the Central Bank’s year-end expectation is 12.1%. The market’s weighted expectation is for inflation in the range of 12-13% at the end of the year, but upside risks to current inflation persist as the impact of exchange rate increases on prices is not 100% reflected. Raising the nominal interest rate to 15% raises our real interest rate to 2.8% based on current inflation. In a year-end inflation of 12%, the real interest rate position will remain at 2%.
Deniz Yatırım/Orkun Gödek:
Strong confirmation that “the rhetoric may have changed”
The Central Bank of the Republic of Turkey (CBRT) raised the 1-week repo auction interest rate from 10.25 percent to 15.00 percent at the November ordinary Monetary Policy Committee (MPC) meeting. Thus, the realization was followed in line with market and Deniz Investment Research Department expectations. The text shared with the public after the meeting consists of shorter, clearer messages than in the past and emphasizes the emphasis on price stability. In addition, we see the message that all funding will be made from the weekly repo rate and that this will be the only indicator for the monetary stance as the clearest step towards simplification in recent years.
After the CBRT’s decision, there is no change in our optimism towards assets priced in Turkish lira over the last 2 weeks. We expect the downward trend in the country risk premium to continue.”
Source: https://www.dunya.com/ekonomi/merkez-bankasinda-yuzde-15le-tek-faiz-donemi-haberi-600775
