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CBRT: New rate cut and December guidance

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The Central Bank lowered the one-week repo rate by 100 basis points to 15%, in line with the scale expected by economists. Despite a weakening currency and the resulting rising inflation, the Central Bank continued to take steps to meet the demand for low borrowing costs. Under the management of Şahap Kavcıoğlu, it reduced the policy rate for the third month in a row.

 

Important notes on today’s decisions and policy statement of the Central Bank;

 

·        One-week repo rate reduced from 16% to 15% (estimated 15%). Of the 24 economists surveyed by Bloomberg, 18 were expecting 15%. Estimates ranged from 14.50% to 16%.

·        Recent rate cuts “started to affect commercial loans positively”.

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·        Developments in consumer loans are followed closely.

·        The Committee expects the temporary effects of supply-side factors and other factors beyond the control of monetary policy on price increases to continue until the first half of 2022.

·        The Committee will consider completing the use of the limited space implied by these factors in December.

·        Due to the strong upward trend in exports, the improvement in the annualized current account is expected to continue in the rest of the year, and the strengthening of this trend is important for the price stability target.

 

Within the framework of the traditional economy perspective, an unorthodox interest doctrine and the approach that higher borrowing costs increase inflation is also reflected in the policy of the Central Bank. While the Central Bank eased a total of 300 basis points in the previous two months with consecutive rate cuts above the expected range, the lira continued to depreciate continuously and point to higher and volatile inflation in the coming months. With the last rate cut, the total easing increased to 400 basis points; The assessment that the limited area will be completed at the December meeting is also a statement that can be read as a sign of a new rate cut. Rate cuts pushed real yields further below zero as consumer inflation rose to 19.9%​​YoY in October. Lira also lost more than 30% of its value this year, and this quarter’s depreciation of more than 15%. This performance places the lira in a very different and out of the equation point among similar developing country currencies. In the next period, the performance of the lira will be determined by the vulnerability created by low interest rates, the Fed’s approach to rate hikes with faster asset purchase cuts against increasing inflation, and what other EM Central banks will do.

 

As known; President Mr. Recep Tayyip Erdogan has made it clearer than ever before that he will not give up on his campaign for low borrowing costs. In line with Erdogan’s assessment of continuing to fight for lower rates, considering the changes in the Central Bank governors and MPC members that took place in the last 2 years, we see a low probability of the Central Bank entering a tightening cycle at this stage. Mr. Kavcıoğlu became the 4th Governor after 2019, after the change of duty in March, and last month, changes were made regarding the members who were reluctant to cut interest rates in the MPC content.

 

While the high economic growth rates are considered as success in government policy; The practices of low borrowing costs, which support the general loan growth, supported this rapid growth path in many periods. On the other hand; The economic repercussions of the pandemic and the recent rising prices have had a significant impact on real incomes, and the depreciation of the currency has weakened the workers’ ability to demand goods and services. By the way; The desire and demand for accelerating growth rates has also increased in the last period, especially in the eyes of the government. We think that a high and volatile inflation path will be an important strain factor in this period. The weakening of the lira increases the effect felt by adding a marginal effect to the rise in global inflation.

 

As a result; Under all these circumstances, we think that the terminal barrier to easing interest rates was passed months ago. The CBRT’s statement that the completion of the limited area will be evaluated in December can be considered as a sign that interest rates will decrease in December. The USDTRY pair is at its all-time high, weighing on its upward move. The continuation of the increase and volatility in exchange rates indicates that we will have difficulties in controlling inflation. The forecast range has widened, and the daily reactions make it difficult to forecast the dollar/TL at this stage. The steps to be taken by other developing countries will also affect the lira. The Fed is the most influential central bank, and if the Fed worries more about inflation and begins to cut its asset purchases faster in December, the dollar’s appreciation will accelerate. The dollarization trend will increase as the lira’s lack of interest support and inflation roll-over effect increase vulnerability.

 

Loose monetary policy can lead to more compelling volatility in financial markets. The risk of tight policy change may also be on the agenda in the coming months. In its inflation report, which was updated at the end of October, the Central Bank raised its inflation forecasts to 18.4% for the end of this year. 3Q21 gross domestic product growth data will be released on 30 November, and November inflation data will be released on 3 December. The December interest meeting will be held on December 16.

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