CBRT: Central Bank stops, inflation runs away

The central bank prefers to remain stable in its monetary policy despite factors such as inflation, which is outside the control band, and the depreciation of the lira. In this context, the Central Bank of the Republic of Turkey did not change the one-week repo rate at its seventh consecutive meeting, in line with the expectations of almost all economists at its July 21 meeting. Although the perspective of the economy management regarding the reduction of interest rates is maintained, the Central Bank does not have any room for easing due to inflation and rising global interest rates, and therefore interest rates have not been the subject of any action in the last few meetings.

If we look at the highlights of the CBRT’s policy statement;

The one-week repo rate remained unchanged at 14% (estimate 14%). Of the 23 economists surveyed by Bloomberg, 22 were 14%; 1 economist was expecting 13%.

The statement removed the reference to the base effect as the initiator of the disinflation process.

The Committee expects the disinflation process to begin with the resolution of the ongoing regional conflict, as well as the measures taken and determined to strengthen sustainable price and financial stability.

The possibility of recession in the main trading partners keeps the risks on the current account balance alive.

Compared to peer economies, job creation was stronger.

Loan growth is ‘losing momentum’ and is being ‘watched closely’.

Tourism-induced improvement in the current account balance continues at a solid pace.

Economic activities further weakened due to geopolitical developments.

The rise in inflation may take a long time, especially due to energy pricing.

Differentiation messages came to the fore in the steps and communications of the Central Banks of developed countries.

Strong growth continues.

Additional measures can be taken when necessary.

The policy statement of the Central Bank has actually caught global growth risks and inflation at two points. While the recession possibilities come to the fore in a more interesting way in major developed countries such as Europe and the US, they also constitute an increasing area of ​​influence for the world economy. Therefore, it is important that the negativities in the export markets also reveal the growth risks in the current account balance risks layer.

Despite that; Macroprudential measures are still at the forefront in the inflation and price perspective of the Central Bank. The normally expected phenomenon in the domestic price reflection of a conjuncture such as increasing uncertainty, worsening expectations, and increasing inflation on an international scale is a rate hike. The Fed and the European Central Bank are increasing interest rates, and the magnitude of these rate increases and the increase in inflation are also negative for countries like us. Consumer price inflation rose to 78.6%, a 24-year high, in June. The policy rate adjusted for inflation reached -64.6%, by far the lowest level among emerging market peers. Both the global spillover effect of inflationary pressures and the exchange rate pressure from the rising interest rates of developed countries can have quite compelling effects on the economy in terms of its reflection on inflation. We have been observing the movement of the lira with this sensitivity in the last few months.

The central bank describes international energy and food prices as the main drivers of rising inflation, but no longer maintains the view that their impact on prices will be “temporary” or that the “base effect” will help lower inflation. As per the guidance here, it is understood that the disinflationary process will come with a little more delay and that no helpful mathematical effect will come before the last month of this year. With the domestic energy and food prices nearly doubling in June, it is understood that the inflation problems may be more permanent than previously predicted by the CBRT. The Central Bank will need to seriously revise its inflation forecast, which is 42.8% this year, in the 3rd Inflation Report of the year next week. We think that the possible base effect in December may pull the inflation towards the 70% band and we do not expect a series of decreases before the first few months of next year.

While the CBRT resorted to alternative measures such as required reserves instead of the main policy tool to combat inflation and restrain credit growth, rediscount credits have been used to support the lira since last year. So far, these instruments have not produced a long-term transformation in stabilizing prices and supporting the currency, except for temporary effects. In terms of inflation pressure, however, there was no main policy use to combat it and the policy rate was kept constant despite all compelling macroeconomic fundamentals. The Central Bank has accepted that high inflation will continue for a while with the changes in its policy statement, but we do not foresee a policy change to prevent this and we expect the government’s low interest demand to support growth to continue.

Monetary policy seems to be stuck between the government’s economic perspective and the factors of inflation and global monetary tightening. As a result; We expect the Central Bank to maintain the status quo similarly in August, and we anticipate that there will be no change in interest rates for the rest of the year.

Kaynak
Hibya Haber Ajansı