CBRT: Real interest rates plunges deep

We do not expect the Central Bank, which has kept its monetary policy fixed for several months, to change interest rates despite the increasing inflation and monetary tightening movements in the world. We see that the Central Bank, which does not have a monetary easing area in terms of economic conditions, is not likely to tighten, as the economy management and political authority want to continue with the low interest policy adaptation for higher growth rates. Therefore, despite the inflation rising to 78.6% in June, the Central bank will not be active in the interest rates that it has not touched for a few months and will keep the interest rates constant.

The compelling effects of economic conditions continue. Despite the 24-year-highest inflation, the inflation-adjusted interest rate has plunged deep into the lowest rate in emerging markets at -64.6%, due to the policy rate held at 14%. A significant part of the depreciation of the lira this year came after the policy rate was lowered below inflation, and as inflation continued to feed and interest rates were kept constant, the attraction of saving lira decreased and the gap in terms of losing the lira to inflation widened. Due to the loose interest rate buffer, the lira is also highly sensitive to external risk factors. Inflation expectations have reached the 70% band in the market and we expect an inflation rate of 70.1% at the end of the year. We think that inflation will feed as the lira depreciates, and that the lira will be further away from savings as inflation increases, and we anticipate an inflation that will remain high due to the double-sided spiral effect.

Economy management prefers to stick to the strategy of providing liraization, keeping interest rates low and growth-oriented economy in a general practice. Within the scope of this practice, instead of raising interest rates, alternative measures such as introducing income-based bonds to support the lira, narrowing some credit channels and encouraging exporters to sell their foreign exchange income are taken. President Mr. Recep Tayyip Erdogan has recently reiterated his assessment that interest rates will not be raised, but that interest rates can be lower, opposing the traditional economic theory of linking interest rates with inflation.

We know that the economic administration and the political administration demand higher growth rates and keep interest rates low. The difficulties in this perspective, which is called the new economy model, the fact that the depreciation of the lira could not be stopped, the increase in the current account deficit due to the commodity price movements in the world, and the portfolio movements against developing countries are not beneficial for the current concept. We see that in any measure that does not use the main policy rate, the stabilization of the lira movement can only be achieved for a certain period of time. With the worsening inflation outlook and rising interest rates in the rest of the world, we think there is no room for policy easing.

Despite this assessment and the intensity of risks, we consider that there is no interest rate hike in the Central Bank’s plan. We do not expect the Central Bank to make any changes in the main policy interest rate until the end of the year.

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