CBRT: Real interest rates plunge even deeper

Despite the sharp depreciation of the TRY, triggered by rising inflation throughout most of this year, the Central Bank made a shock discount at the MPC meeting in August. The policy rate rationality, which was kept at 14% since December and fell to 13% last month, was attributed to the signs of a slowdown in the economy, showing that an urgent tightening against rising inflation was not in the plans and this situation continues. Since Turkey prioritizes growth over price stability, there is no reason for the interest rate increase perspective to settle. We expect the Central Bank of the Republic of Turkey to keep the interest rates at 13% at the September meeting, after the August cut was declared as “adequate according to the current outlook”.

Despite rising inflation and a weakening lira, the bank cut its policy rate by 100 basis points in August. This brought the policy rate adjusted for inflation to -67.2%, the lowest level among peer emerging markets. Since that meeting, the annual inflation rate has risen further in August, reaching 80.2%.

Growth exceeded expectations at 7.6% YoY in 2Q22. Industrial production slowed from the first-half average of 9.9% in July, but still recorded 2.4% growth throughout the year. It is highly probable that the economy will lose momentum in 3Q22, and signs of slowdown are seen in the manufacturing industry, on the brink of leading indicators. We assume that the bank is putting pressure on macroprudential tools to curb and steer loan growth and will seek further rate cuts in 4Q22 if the recent slowdown in leading indicators continues.

In general, the inflation plan is based on reducing inflation pressures through macroprudential measures and external factors. The global rise in commodity prices due to Russia’s invasion of Ukraine in February is still seen by policy makers as the main culprit for inflation, thus allowing interest rates to remain low against inflation in the current period. The short-term increase in Turkey’s gross foreign exchange reserves, the financing provided to a large extent by net errors and omissions, and the recent decrease in exchange rate volatility may have given the Central Bank a certain level of confidence in continuing to apply this point of view.

Instead of higher rates, the central bank took macroprudential measures that helped slow credit growth. Indirect interventions and government-sponsored accounts that protect savers from the weakness of the lira also remain in the main package of measures. These macroeconomic conditions require an interest rate hike from a normal Central banking perspective. Even so, we think that the CBRT will wait for now, as the Central Bank prioritizes growth over price stability.

Kaynak: Tera Yatırım-Enver Erkan 
Hibya Haber Ajansı