While inflation is surrounded by the effects of weak TRY and the risks created by the global financial conditions and price movements environment; The Central Bank preferred to keep the policy rate constant. In May, although inflation stopped its 7-month increase series; As this reflects the quarantine conditions created by the coronavirus cases, the overall outlook continues to be overshadowed. From this perspective; Despite the real interest rate, which was increased by the monthly decrease in inflation, the general consensus was that there would be no change in interest rates, and the Central Bank acted in line with the forecasts.
Important notes on today’s decisions and policy statement of the Central Bank;
· The general expectation of economists was that interest rates would not change.
· The CBRT says that the current “tight monetary policy stance” will be resolutely maintained until the significant decline in the forecast path of the April Inflation Report is achieved.
· The policy rate will continue to be set above inflation in order to maintain a strong disinflationary effect until strong indicators point to a permanent decline in inflation and the medium-term 5 percent target is achieved.
We have stated that the Central Bank should be read through the expressions in the policy text, in this respect, the expressions entering and leaving the text are now in our focus. The Central Bank made a hawkish change and used the reference “tight” again in relation to its monetary stance, which it changed to “current” last month, and included the phrase “resolutely” in the text. When the existing inflation and financial conditions are evaluated together with their risks, it is seen that there is a good change in terms of not deteriorating the monetary tightness level. However; The inflation forecast path predicted by the Central Bank still points to 12.2% for the end of the year, which is an optimistic point compared to market-based expectations. This assumption also includes the view that inflation already peaked in April. We assume that the interest rate path will progress in line with inflation, the reference given for the coming months is based on the end of 3Q21, with the expectation that a inflations will give more room for cuts. President Mr. Recep Tayyip Erdogan, on the other hand, evaluated that interest rates could be cut in July or August. CBRT Governor Mr. Şahap Kavcıoğlu’s current guidance continues to be that “inflation-adjusted interest rates” (real interest rates) will remain positive and that “there will be no premature easing in policy”.
Despite the commitment to maintain tightness in monetary policy until the 5% inflation target is achieved in the medium term, TRY has not been able to break the general depreciation trend. Although the Fed did not change its official policy stance yesterday, the signals of the change related to the transition to the tapering process within the Bank were sent to the market. The fact that the liquidity will begin to withdraw abroad poses a risk in terms of money movements in developing countries, and when real interest rates start to increase in the USA, the demand for USD will also increase. In order to provide reverse currency substitution, TRY yields are not sufficient for the savings holders, and the risk balance and inflation uncertainties cause the foreign currency to continue to be demanded.
Our real interest rate rose above the 2% level again after the May inflation. However, if we add the assumption that there will be no policy rate hike yet, factors such as TRY depreciation, global supply problems and the fuel tax that came into effect at the end of May will continue to form the basis for the inflation increase and keep the risk balance upwards. The PPI rose to 38.3% in May, widening the gap with the CPI, and new effects will be added to the transition effect through current cost channels. Since the inflation decline in May is not based on macroeconomic fundamentals, it will not have a permanent effect and inflation will remain on an upward path in the current period. In this period, we think that the basic conditions for lowering interest rates in 3Q21 will not be at a mature stage, or even will not be valid. At best, it is more likely that the Central Bank will wait until the end of 3Q21 and beyond. In this period, as inflation will continue to create uncertainty, the room for action may be limited. Therefore, even if the interest rate is lowered by the end of 3Q21 or in 4Q21, it will have to be reduced on a limited basis.
While the June inflation will be announced on July 5, the Central Bank will hold the next MPC meeting on July 14.
Kaynak Tera Yatırım
Hibya Haber Ajansı
Kaynak: Hibya Haber Ajansı
