Marc Jones / Jonathan Spicer
ANKARA, 17 March (Reuters) – The Central Bank (CBRT) faces a big test tomorrow to maintain its hard-won reputation after the appointment of new president Naci Ağbal. Will the CBRT put its rhetoric on tight monetary policy into action and raise interest rates by meeting the expectations of almost all analysts or keep them constant?
The policy interest rate applied by Turkey at the highest rate among major economies in the world with 17% and President Recep Tayyip Erdogan is also no secret that he wants a moment before easing to the economy struggling to recover from the epidemic.
However, sales in the bond markets around the world caused the TL to depreciate this month and inflation rose more than expected, approaching 16%. Following this, pressure increased rapidly for the CBRT to raise interest rates by 100 basis points to 18%.
Five questions about the CBRT’s monetary policy to be held tomorrow:
1- Will CBRT Increase Interest Rates?
Annual inflation has risen to mid-2019 levels, while inflation has almost always been in double digits for four years. After losing last month’s earnings by 10% dependent on imports, which had increased even further pressure on inflation in the economy of Turkey.
Almost all economists who took part in the Reuters survey expect the policy rate to be raised to 18%. While the rise in bond yields has put pressure on all emerging markets, Ağbal’s margin for error, which Erdoğan appointed in November, is minimal. Currency Management Macro Strategy Head John Floyd said, “The most important thing is to meet or exceed market expectations. The more positive steps they take, the more they can protect themselves.”
2- Can Interest Increase Be Made?
When Erdogan appointed Ağbal, he admitted that a “bitter prescription” might be required to lower inflation, and the same goals were emphasized last week.
However, taking the unusual view that high interest rates increase inflation, Erdogan abruptly fired the last two CBRT presidents, which has raised questions about the independence of monetary policy in recent years.
Even if Ağbal tightens its monetary policy tomorrow, it may even have to take more steps soon. Because rising energy costs are expected to keep inflation up for a few more months, and according to some market measurements, interest rates may even rise above 18% before falling towards the end of the year.
“Investors are seeking assurances that there will be no political interference in monetary policy,” said Kieran Curtis, fund manager for Aberdeen Standard Life, adding that “raising interest rates will underline the message we heard from Erdogan last week that the fight against inflation is a priority.”
3- What Else Weakens the Reputation of the CBRT?
CBT rapidly depleted foreign exchange reserves have led to markedly markets from foreign investors in Turkey over the past two years. Only in last year’s foreign exchange reserves in the nature of buffer only 3/4 the decline in net base last year, leaving Turkey in a more vulnerable position in the face of financial crises.
The fact that the CBRT has lost approximately 130 billion dollars in reserves through public banks since 2019 in order to support the TL is a factor that reinforces the decrease in net reserves.
While Ağbal promised to increase reserves again, Ağbal’s more traditional stance on monetary policy also halted the flow of foreign funds from the country and allowed them to enter the country again.
4- Will Domestic Investors Start To Trust The TL?
The depreciation of the TL, which has continued for years, caused locals to turn to dollars, euros or gold, especially as inflation increased the cost of living.
While negative real interest rates a year ago increased the distrust of domestic investors, the tightening in monetary policy caused real interest rates to increase.
Foreign currency deposits and funds of domestic residents, including precious metals, increased slightly to $ 236 billion this month, after hitting a record high last month.
At Tera Yatırım, economist Enver Erkan stated that the return to TL will only be experienced if inflation decreases or the real return on TL deposits increases sustainably.
Erkan said, “The local investor should come to a position to believe that the TL will increase in value. This will take time,” he said.
5- What Happens If Interest Rates Increase or Not?
Analysts say a 100-point increase in the policy rate will reduce the recent volatility in the markets and strengthen Ağbal’s reputation by raising the interest rate from 10.25% to 17% in November and December.
If the CBRT keeps the interest rate constant contrary to expectations, Ağbal may face the risk of falling behind the market and may be at the mercy of global markets on the path of economic recovery.
Floyd, “expected to be experienced more disruption on Vaccination and approaching tourist season, there is an opportunity for Turkey to show itself,” he said.
Inflation is still in the CBRT’s expectations range. However, if the TL depreciates again, the inflation expectations of the central bank and the market will likely rise further.
Erkan said, “We are entering a period where inflation risks may increase … The possibility of depreciation and volatility in TL may create additional inflation risks.”
Translated by: Berna Suleymanoglu
Editorial: Nevzat Devranoğlu