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CBRT 2022 Monetary and Exchange Rate Policy: Reserve increase, TRY deposit development, rediscount loans

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According to the 2022 annual policy text of the central bank, inflation targeting will continue in 2022 and the 5% medium-term inflation target will be maintained. According to this;

 

·        The floating exchange rate regime will continue.

·        One-week repo rate will continue to be the main policy instrument.

·        The size of open market operations will be determined as 5% of central bank assets.

·        More reserve accumulation is expected in 2022 with rediscount credits.

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·        The ROM mechanism will expire in 2022.

·        The central bank may gradually reduce its foreign exchange sales to government institutions.

·        The central bank will continue to negotiate with other monetary authorities for swap agreements.

 

Apparently; In 2022, the CBRT and the CMBs of the world will differ in terms of practices regarding the main policy principles. The monetary policy implementation trend in the world is proceeding in the form of increasing interest rates against inflation. In this context, it is clear that global financial conditions will be tighter and interest rates will increase. On this ground, if we consider that the CBRT’s policy-oriented practice is to reduce TRY interest rates, it is normal to have some reservations about the exchange rate and a volatility factor over it. This volatility is currently desired to be managed with swaps, structured products, side monetary policy instruments and the recently issued currency protected time deposit alternative.

 

Apparently; The 5% inflation target continues, verbally and in writing. The problem is; We are well above this medium-term target in both current and future inflation. Therefore, while there is no movement in this direction in the implementation results, it is necessary to have a basis for fighting inflation in order to express this target in a realistic way. We followed the concept of global inflation in 2021, the main reasons for this were the slowdown in the production line and the associated price increases in the world. In the 2021 Turkish inflation concept, local pricing base dynamics also entered global factors due to the depreciation of the lira, and inflation layered. We expect these effects to continue in the foreseeable period, the inflation, which will probably take place at a rate of 26-27% at the end of 2021, will continue to move upwards with 2022. Under these conditions; Some hit risks have also increased in terms of compliance with both the MTP and the estimation and targeting of the Central Bank. Periodic deviations still occur in a very clear range. When excessively volatile prices, which create congestion due to current prices, also enter the unreflected cost axes, this time, inflation may encounter more flash effects over the final goods supply. Our predictions are that it will be difficult to reduce inflation to single digits until 2024 unless there are very important disinflationary developments in current dynamics.

 

As it stands; It is difficult to reach the 5% medium-term inflation target with this structure. Now, let’s look at the effect of the new perspective on the Central Bank’s policies in the current economic approach. In the 2021 Monetary and Exchange Rate Policy document, tight monetary policy and reserve increase were emphasized. The new economy perspective in 2022 highlights the dynamics of growth. In the new economic model, an economic transformation that accelerates its activity and foreign currency inflow by keeping TRY interest rates low, the decrease in borrowing costs directing firms to investment, and export/employment dynamics and current account surplus is presented. In this case, our prediction on the Central Bank’s interest rates is that it will either be at its current level or at lower levels in a few months. The Central Bank’s not using the interest rate, which is its most important tool, against inflation and developing a control mechanism with other instruments is a practice that is difficult to achieve in practice. We would like to express our reservations that it may cause problems.

 

We calculate that inflation rates will remain very high in December and next year. With the transition to 2022, we will see inflation rates above 30% for a certain period. In this process; We anticipate that the policy response of the Central Bank will include side instruments other than interest. At this stage, we will see similar practices with the use of TRY required reserves, the issuance and promotion of currency-protected deposits. The weekly repo rate continues to be the main policy rate appropriately. It is positive in terms of simplification, but since it will not be used in practice, the composition may also become complex, especially in terms of funding. In this regard, it is necessary to look at the possible consequences of existing TRY investment incentives. Decision makers also expect price stability in relation to the normalization of temporary factors of price volatility, the interest in the new deposit product and the first results of the model in the economic transformation period. Our view is that areas other than the main policy use will be challenging to take the initiative in terms of inflation control in the short run.

 

In general, the actions of the Central Bank such as required reserve or foreign exchange intervention were not effective. After 20 December, there is a serious regression in exchange rates. We should have clearer evidence for this move to be a massive TL activity on the new deposit product. In this context, we will continue to monitor the conversion of FX deposits to TRY and the increase in total deposits using data. There is still a lot of volatility and we think that such daily or general movements pose management challenges for the macroeconomics. In this regard; We consider the necessity of written, verbal and actional proactivity necessary for the policy implementation of the Central Bank.

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