Economists weigh in on Central Bank's 500 basis point rate hike decision

The Central Bank of the Republic of Turkey (TCMB) has raised its policy rate by 500 basis points to 40 percent. Experts stated that the Central Bank could complete its rate hike cycle by raising the rate to 45 percent in December.

“I DO NOT EXPECT ANY HIKES UNTIL THE LOCAL ELECTIONS”

Evaluating the 500 basis point rate hike, Prof. Dr. Emre Alkin expressed his prediction that the Central Bank will not raise interest rates until the local elections, stating: “Nothing will happen until January. If it doesn't happen in December, there won't be a hike until the local elections. Until the local elections are over, the 2024 inflation target of 36 percent presented in the medium-term program and by the Central Bank will not change. Since it won't change, the Central Bank will say, ‘Here is a 40 percent real interest rate, I am giving you 2 points above that.’ We also see confusion in the statements. Normally, Central Bank texts are complex, but they do not act to break rational expectations. It is creating a rational expectation here. The message given is that there will be no interest rate hikes until the local elections. But if they make another 5-point hike in January as if it were a joke, then that would be a situation that conflicts with Central Banking. The Central Bank's job is to say, ‘I will implement these under these probabilities.’ It does not have a mission to surprise citizens, business people, or investors.”

“AN INTEREST RATE OF 45 PERCENT IS MORE REASONABLE”

Prof. Dr. Sadi Uzunoğlu stated that the market expectation was a 250 basis point hike and said: “A 45 percent interest rate could be a rate that better demonstrates the central bank's determination in the fight against inflation. Because the inflation expected by the market is at least 40 percent. You brought it to 40 percent, and it is necessary to move to a positive real interest rate above that. Therefore, moving to a positive real interest rate is also important in terms of stopping foreign exchange demand and the constant upward movement in exchange rates. I think the Central Bank's decision is very correct, meaning they made a very good rate hike. It is as it should be, but I am among those who argue that they should not close up shop at 40 percent. If we are really going to fight inflation seriously, a 45 percent interest rate seems more reasonable to me.”

“THE RATE HIKES SHOULD END AROUND THESE LEVELS”

Congratulating the Central Bank for their difficult decision, Info Yatırım Deputy General Manager Mert Yılmaz made the following assessment: “It is a truly difficult decision; I congratulate the Central Bank. It is a surprise for the market, but the Central Bank's 12-month inflation target is 36 percent. The current policy rate is 40 percent. It has turned the real interest rate into a real return, into positive territory. The rate hikes should end around these levels; if they do not, it could bring about different problems in the coming period, especially regarding the activity of the credit channel, businesses' access to credit, and growth. I think there is a 51 percent probability that the Central Bank has finished its rate hikes with this meeting. I think they will pass on December. Another hike might come in December, but I think this hike will be smaller than 500 points.”

"WE MAY SEE ANOTHER 500 BASIS POINT HIKE IN THE NEXT STEP"

Bahçeşehir University Center for Financial Studies Director Prof. Dr. İbrahim Ünalmış evaluated the TCMB's rate decision, which was above expectations, with these words:

“There will likely be one more upward decision at the MPC meeting, and then they will switch to a wait-and-see policy. Financial conditions show that we have entered a tightening period as of November. Another upward decision may come in December. We can say that the next step will also be 500 basis points and that financial conditions will tighten further.

The liquidity side is important. My guess here is that tightening measures will continue. Otherwise, it weakens the transmission mechanism.”

"QUANTITATIVE TIGHTENING WILL CONTINUE"

Bilgi University Rector Prof. Dr. Ege Yazgan evaluated the Central Bank's decision with these words:

“In addition to interest rate decisions, there will also be decisions regarding liquidity. Meanwhile, it is stated in the decisions that quantitative tightening steps will continue to reduce liquidity. I evaluate it as a good decision. Tightening will continue until the end of the year, perhaps one more upward move, and then a wait-and-see policy will follow.”

"IT IS TOO EARLY TO SAY THAT ALL RISKS IN THE ECONOMY HAVE BEEN ELIMINATED"

Coface Turkey and Middle East Economist Seltem İyigün made evaluations regarding the TCMB's interest rate decision, which was above market expectations. Stating that her expectation was a 300 basis point rate hike, İyigün expressed the following:

“When we evaluate it with inflation dynamics, we can say that the decision is appropriate. I think they will continue with interest rate hikes from now on. My expectation for the peak point of interest rates is at the 45 percent level. The main reason for this is that the peak point in May of next year will be 75 percent, and we have not yet entered a period of very permanent decline in inflation momentum indicators and 12-month inflation expectations.

It is too early to say that all risks in the economy have been eliminated, because there will be minimum wage adjustments before the election period. On the other hand, there is also an expectation regarding which side fiscal policy will tighten more after the elections. We may see another round of tax increases. This could contribute to rising inflation.”

"THERE IS A MESSAGE IN THE TCMB DECISION TEXT THAT THE RESULTS OF THE STEPS TAKEN ARE BEING RECEIVED"

Bilgi University CEFIS Research Director and Spinn Consulting Founding Partner Özlem Derici Şengül made the following comment about the rate hike and the decision text:

“It is a very strong decision in terms of perception. When positive real interest rates were in question, market expectations had fallen. My expectation had also fallen towards the possibility of returning to 250 basis point steps. However, by raising the interest rate above market expectations, the TCMB signaled how determined it is. Although the decision taken did not create sudden and dramatic volatility for the market, it will have quite large effects on the real sector and households.

The TCMB has very clear guidance. The reason it does not say that (tightening) will continue at a slower pace and that it has likely reached the end is probably because there are expressions in its assessment that make one feel that the results of the steps taken are being received. However, the speed of this is still unknown.”

"THE TCMB WILL STOP THE INTEREST RATE AT THE 45 PERCENT LEVEL AND MOVE TO MONITORING"

Gedik Investment Chief Economist Serkan Gönençler said the following regarding where the TCMB will end its tightening steps in monetary policy:

“I do not consider the TCMB's decision a surprise. We were thinking that the Central Bank might want to get ahead of the market a bit and use this opportunity to anchor inflation expectations. I do not think (tightening) has stopped. In fact, it has given very clear messages that it will continue, but it says the pace of tightening will be slowed down. It also says it will be stopped in the near future. I understand from this that they will raise the interest rate for 1-2 more meetings, stop it at a level like 45 percent, and then move to monitoring.”

News Source: 12punto