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CBRT: Rate cut trend continues while inflation rises

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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 rates for the third time in a row by 100 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.

 

We are monitoring the effects of the rate cuts, which exceeded the consensus estimates in the last 2 months. The Central Bank eased a total of 300 basis points. Lira-based interest rates, which fall well below inflation, not only reduce the attractiveness of keeping savings in local currency, but also make it difficult to bring inflation down to the tolerance threshold. Inflation risks accelerating further in the period after November, with higher oil prices and a weaker lira. Under normal circumstances, there is no room for easing for the current period and the coming months. However, we make this assessment not within the scope of economic data within the framework of current conditions; we make the non-inflation factors more prominent within the scope of the guidance. Therefore, while our expectations for inflation and exchange rates are higher than before, our expectations for interest rates are lower. On the other hand; President Mr. Recep Tayyip Erdogan’s evaluations about the need to lower interest rates are known.

 

Financial markets think in a similar vein on this issue. It is expected that the Central Bank will continue to cut interest rates within limited space guidance. With a front-loading approach, we foresee a move towards 15%, which we normally see as the terminal threshold, with the interest rate cut, which is within our expectation this month. We think that a reduction action in this direction or beyond will make it difficult to control the lira volatility and inflation rates. These factors determine the sensitivity of the movements in the exchange rate, specifically the lira. Lira positions in the market show that we may not have a comfortable period.

 

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There will also be interactions in developing countries’ adaptation to financial conditions that affect our position as the Fed will likely adopt a more hawkish policy advance. On the way to the Fed tapering statement; We observed that many developing country central banks achieved a certain level of stabilization by increasing interest rates. The most recent important developing country central bank that increased rates was Mexico. We have observed that a few countries such as Brazil, Russia, Poland and Hungary have interest rates before. Further tightening is on the table for emerging economies as the Fed will likely accelerate bond purchase cuts due to the high inflation threshold. In this period, the possible strengthening of the dollar will affect the movements of the exchange rates. We position Turkey at an exceptional point, not including it in the tightening equation at this stage.

 

Central Bank’s rhetoric about inflation and interest rates, scaling the discourses softer over time, current account balance discourse that raises concerns that lira weakness can be tolerated (We think that this model is incomplete due to import dependency, we are not in a position to stretch imports in energy, raw materials and food. So we do not anticipate any effect on price stabilization by providing a natural foreign exchange inflow.), we think that it is not at a tight enough stance within the factors of a de-dollarization criterion that will go beyond interest rates in the long and later term. We would like to point out the risk that the front-loaded easing of monetary policy may force the conditions for a drastic policy transformation in the future within the framework of increasing financial and macroeconomic instability.

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