CBRT: Real rate remains well below peers as policy rate falls

Despite the compelling developments of the Central Bank in the recent period, we consider that the trend of lowering interest rates continues in line with the expectation that is reflected in the markets.

Despite the compelling developments of the Central Bank in the recent period, we consider that the trend of lowering interest rates continues in line with the expectation that is reflected in the markets. In this context, we expect the CBRT to cut interest rates for the third time in a row by 25 basis points tomorrow. We would like to state that we have formed our expectation regarding the said decision not within the economic conditions, but in line with the current guidance and economic policies.

 

Although we expect a lower scale of rate cut compared to the market, it is difficult to predict how far the rate cuts can go, since the policy perspective applied is not at a conventional point. In fact, this situation raises the standard deviation of monetary policy to very high levels not only for December 16, but also for the future. In the framework of the new economic perspective put forward by President Mr. Recep Tayyip Erdoğan, the demand for the Central Bank to ease the monetary policy is actually the main point in terms of the growth profile desired to be achieved in the economy. Therefore, at this stage, although exchange rate volatility feeds inflation, a U-turn effect is not expected. Nor do we expect an abrupt policy shift until the results of the new economic perspective are seen in a few months.

 

The Central Bank has cut the policy rate by 400 basis points to 15% since September, and the lira has lost almost a third of its value in that time. Many countries are increasing interest rates (such as Brazil, Russia, Poland), but with the CBRT's cuts and the current increase in inflation, the interest rate-inflation gap rose to 630 basis points. Adjusted for inflation, Turkey's interest rates remain low in real terms. When we put this side by side with other countries, it is seen that Turkey offers the deepest negative real return by far. A further decrease in policy rates and a further increase in inflation in the coming months will bring negative real interest rates to extraordinary levels.

 

The implementation of expansionary policies in the economy seems to increase inflation even more. Therefore, we think that the extremely loose monetary policy will exacerbate the problems. Especially exchange rate and cost inflation will cause general inflation rates to rise in the coming months. The issue of the Central Bank's rate cuts became increasingly challenging and affected the sustainability of the economy. Market participants predict that rate cuts will continue despite challenging inflation conditions. In fact, this can be seen as the most important negative factor reflected in the pricing behavior. We do not expect the status quo in question to change without a serious transformation or change in approach in monetary policy. Therefore, our inflation expectations are not optimistic at this stage. On the other hand, we think that the conditions for monetary tightening have been met, but the government and the Central Bank's bar for this transformation is much higher than in the past. In our opinion, the CBRT, which will meet the day after the US Federal Reserve, which is expected to announce a tighter policy path, should follow an orthodox path by evaluating inflation and external financial conditions. On the other hand, the perspective considered in making policy decisions shows that it is more likely at this stage for us to stay on the current policy of easing.

 

It is not easy to estimate the range of rate cuts because more data is needed to fit the economic approach into the model. This causes current data to diverge from the main long-term trend in terms of both exchange rate and inflation. In this environment, the levels at which the exchange rate and inflation can go are not very clear.

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