CBRT: Emphasis on macroprudential measures in an environment where rates do not change

The Central Bank of the Republic of Turkey did not change the interest rates in the fifth month, despite the rapid depreciation of the lira in the last period. While the supportive monetary policy stance and economic evaluations of the Governor Mr. Şahap Kavcıoğlu administration did not change, the Monetary Policy Committee kept the benchmark one-week repo rate at 14%, in line with the forecasts of all economists.

The extremely negative interest rates of the Turkish lira, adjusted by taking into account inflation, cause the internal buffers to remain weak against external factors such as the rally in global commodity prices and the rising interest rates of developed countries, leading to an increase in depreciation. Under these conditions, the constantly declining composition of the Central Bank’s international reserves also brings about the financing of the increasing current account deficit under non-ideal conditions. The lira is performing its worst ever in emerging markets in 2022, with a loss of about 19% against the dollar.

Major central banks such as the Fed, the European Central Bank and the UK are tightening their monetary policies, although the coefficients and dynamics between countries are different. It is seen that the determinations and methods have not changed regarding the adaptation of the central bank to the tightening global financial conditions and higher interest rates. While the central bank reiterated its supportive monetary policy stance, it has developed a more optimistic outlook regarding the global outlook. In this regard; In his statements in the past months, Mr. Kavcıoğlu signaled that Turkey does not need to raise interest rates just because other central banks are doing this.

In line with the views of President Mr. Recep Tayyip Erdoğan, the adaptation of low-interest policies to increase growth is currently in practice by the economic actors and ancillary instruments are being developed to protect it from the effect of the exchange rate/inflation spiral. For this reason, the CBRT has turned to side measures and liquidity steps instead of raising interest rates for a while; The government also introduced measures such as the introduction of state guarantees on some bank accounts to protect depositors from the weakness of the lira. Although currency-protected bank accounts provide stability for a certain period, deposit interest rates remain well below the 70% inflation rate as of April. Inflows to FX-protected accounts have slowed in recent weeks, and the Central bank’s reserves have also fallen sharply during this period. This situation does not put the lira’s future expectations on a level that will help the inflation to recover even under an extremely loose monetary policy. As inflation rises, the purchasing power of households weakens, causing a plane that compresses the economy in the direction of domestic demand and a deterioration in growth dynamics.

Factors that may be experienced through the determinants such as market disturbance that may occur in the axis of the geopolitical situation, uncertainty in global prices, and supply insecurity pose a risk for Turkish financial assets and macro parameters. Turkey’s current differences of opinion with its NATO allies should be evaluated in terms of foreign relations, and the rise in commodity prices after Russia’s invasion of Ukraine should be evaluated in terms of the deepening of the current account deficit and increasing foreign exchange demand.

It is understood that policy measures will be evaluated with instruments within the scope of liraization. At this point, we see that ancillary measures and instruments will be applied when deemed necessary regarding liquidity instruments or on behalf of investment, savings, commercial and financial borrowing liraization and instruments. There may be serious uncertainties and adverse effects regarding the projected disinflation process. In this context, the effects of measures other than the policy rate, which is the main instrument of monetary policy, on the exchange rate and foreign exchange demand are important, but as seen in the FX-linked product, such measures are effective for a certain period of time. The difference between interest and inflation increases the possibility of including inflation-indexed products in the measure set.

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