The Central Bank unexpectedly lowered the benchmark interest rate to 18%. In an inflationary environment, where headline inflation rose to 19.25% in August, eradicating the entire real return effect of the lira, and items such as food and energy, which weighed heavily on individual expenditures, would be faced with the impact of high prices, this increased the risk of lira volatility and thus the risk of additional inflation pressure. The lira extended its post-decision decline above the 8.80 level against the dollar.
Important notes on today’s decisions and policy statement of the Central Bank;
· 22 of 23 economists surveyed by Bloomberg did not expect any change; one economist had predicted a 50 basis point cut.
· Leading indicators show that domestic economic activity continued to remain strong in the third quarter with the help of strong foreign demand.
· Positive external demand conditions and the current tight monetary policy positively affect the current account balance.
· High inflation expectations continue to pose risks on pricing behavior and inflation outlook.
· The recent increase in inflation stemmed from supply-side factors such as the increase in food and import prices and supply constraints, the increase in administered/directed prices, and demand developments due to reopening. These effects are considered to be caused by temporary factors.
· The slowing effect of monetary tightening on credit and domestic demand is monitored.
· The tightness in the monetary stance started to exert a more contractionary effect on commercial loans than anticipated.
· Macroprudential policy framework was strengthened to curb retail loan growth.
· It was decided that a revision is needed in the monetary policy stance and that the policy rate will be lowered.
In the guidance on inflation; especially after Mr. Kavcıoğlu shifted the policy focus to core inflation, which excludes volatile items such as food and energy, and which was approximately 250 basis points lower than the headline figure, in early September, the change in the policy ground seems to confirm this focus. It is also noteworthy that the Kavcıoğlu administration, which did not change interest rates for 5 consecutive meetings, did not include the phrases “decisive tight stance” and “interest on inflation” in their policy statement for September. This can also be an approach that brings the focus of growth to the fore in economic targets. As it will be remembered; President Mr. Recep Tayyip Erdogan evaluated cheaper borrowing costs and slower inflation and commented that there may be a loosening in policy.
In March, After Mr. Ağbal’s dismissal, Mr. Kavcıoğlu had made a commitment to keep the interest rate above the inflation rate in the previous 5 months and did not make any rate cuts when the increasing inflation did not exceed the policy rate. However, when inflation, which exceeded the policy rate compared to August inflation, rendered the old guidance dysfunctional in practice, he preferred to change its policy direction instead of raising interest rates from the two options before it. We see that the Central Bank will pay more attention to the core inflation (indicator C) criterion, which is lower than the headline inflation. Depending on the policy route of the following months; Either the scope of rate cuts will expand according to the core inflation approach, or the headline inflation expectations, which the Central Bank sees as temporary and expects to decline in 4Q21, will remain. It is important which of these two approaches he will evaluate in terms of the point that rate cuts will reach. However, it is important to keep in mind that although inflation has receded due to the base effect, there is still a significant upside risk in secondary effects. These risk factors are; Global supply shortages, lira weakness, agricultural production, the reflection of the inflation trend on pricing behavior, price increases in food and energy during the winter months, and the additional effect of volatility that may arise from the rate cut in the exchange rate and the new policy stance. It may also affect the accumulated cost effect, which may be reflected in higher CPI inflation in the future.
If we consider the depreciation effect of the lira after the reshuffle at the Central Bank on March 20; Market behavior regarding the early easing cycle may cause the lira to continue its depreciation in an environment where major central banks intend to implement tighter policies. At this point, the past practices of the Central Bank have been experienced as the failure of the continuation of the early and rapid easing cycles due to market pressure and the need to make late tightening again.
Finally; The credit aspect of the business should also be taken into account. Because here, one of the sentences we bolded above is about commercial loans. As is known, the economy management and banking regulator want to reduce the weight in consumer loans within the scope of macroprudential measures. On the other hand, it is seen that it is aimed to reduce the interest burden in order to respond to the demand for lower borrowing costs by the industry and real sector in terms of commercial loans. Here, too, the comment that the high interest rate application caused a higher-than-expected contraction in commercial loans found its place in the policy statement.
Kaynak Tera Yatırım
Hibya Haber Ajansı
Kaynak: Hibya Haber Ajansı