Monetary tightening steps to be completed as soon as possible for the permanent establishment of price stability

The summary regarding the CBRT Monetary Policy Committee's meeting on December 21 has been published.

The summary stated that a limited improvement in inflation expectations and pricing behaviors has begun to be observed. It was noted that the consumer inflation diffusion index, one of the indicators followed to monitor developments in pricing behavior, continued to decline in November as the share of products with falling prices increased. The summary also reported that the diffusion index for the core goods group, where inflation can slow down rapidly during periods when the impact of shocks weakens, has retreated to its historical average.

The summary stated, "The decline in inflation expectations is continuing. According to the results of the December Survey of Market Participants, the year-end inflation expectation for the current year fell by 1.84 points from 67.2 percent to 65.4 percent; the 12-month-ahead inflation expectation decreased by 2.71 points from 43.9 percent to 41.2 percent; and the 24-month-ahead inflation expectation declined by 0.27 points from 25.1 percent to 24.8 percent. On the other hand, the 5-year-ahead inflation expectation rose by 0.34 points to 12.6 percent. In addition to the level of inflation expectations, a partial improvement has been observed in their distribution. The distribution of 12-month-ahead inflation expectations points to an increasing consensus around the central tendency compared to the previous month."

Assessing that the levels reached in loan interest rates with the impact of monetary and quantitative tightening and simplification decisions are consistent with the targeted level of financial tightness, the summary stated, "Between the week of the previous MPC meeting, when the policy rate was raised by 5 percentage points, and the week of the last meeting, commercial loan interest rates and consumer loan interest rates showed a flat outlook with changes of 0.2 and 0.92 points, respectively. In the same period, deposit interest rates increased by an average of 4.04 points across all maturities and by 6.1 points for 3-month deposits, strengthening monetary transmission."

Stating that housing loan interest rates, which have followed a flat course since the previous MPC meeting week, stood at 42 percent, the summary noted the following:

"Vehicle loan interest rates decreased by 750 basis points due to the effect of year-end sales campaigns and stood at 32.8 percent, while consumer loan interest rates (excluding Overdraft Accounts-KMH) saw a moderate increase and stood at 61.7 percent as of December 15, 2023. On the other hand, Turkish lira commercial loan interest rates followed a flat course and stood at 51.8 percent. Normalization in loan growth and composition has continued. As of December 15, 2023, compared to the end of 2022, the individual loan balance has increased by 141.7 percent in credit cards, 85.0 percent in vehicle loans, 41.1 percent in consumer loans, and 21.8 percent in housing loans, for a total increase of 67.4 percent.

Individual loans, which entered a slowing trend with monetary tightening and other steps taken, showed a slight increase in their average 4-week growth rates since the week of the previous MPC meeting due to the effect of year-end expenditures, reaching 3.33 percent. This rate is 2.29 percent and 2.10 percent for vehicle loans and consumer loans, respectively. For individual credit cards, this rate was higher at 6.26 percent. On the other hand, the average 4-week growth rates of Turkish lira and foreign currency commercial loans, adjusted for exchange rate effects, were 2.18 percent and 0.02 percent, respectively, in the same period."

"It was assessed that the commercial loan composition will be of a nature to contribute to the current account balance"

The summary stated that with the goal of ensuring the continuity of price stability, technological transformation that will improve the current account balance, strategic investments that will contribute to supply continuity, and exports continue to be supported.

In this context, the summary noted that the programs being implemented are being developed to include both access to credit and financing costs, while also observing macro-financial balance. It was emphasized that the Investment Commitment Advance Loan (YTAK) program, which aims to use long-term and low-cost resources in areas that will support macro-financial stability, is being implemented within a framework that highlights the contribution to price stability and the technological added value and strategic nature of the investments.

The summary also noted that while general loan growth is normalizing, it is assessed that the commercial loan composition will be of a nature to contribute to the current account balance through the regulatory changes made in export and foreign exchange-earning services rediscount credits.

Explaining that the flow of Turkish lira commercial loans was primarily established with the measures taken as part of the simplification process since June to ensure the healthy functioning of the banking system, the summary emphasized the following:

"Turkish lira commercial loans, which recorded an increase of 0.34 percent across the sector in June, grew by 2.38 percent in July, 2.26 percent in August, 2.52 percent in September, 2.39 percent in October, and 2.20 percent in November. During this period, Turkish lira deposit interest rates stood at 24.9 percent in the week of August 18, 33.5 percent in the week of September 15, 37.9 percent in the week of October 13, 40.8 percent in the week of November 17, and 45.8 percent in the week of December 15. In parallel with this, while Turkish lira-denominated deposits have started to increase, a decrease is observed in FX-protected deposits. With the latest steps taken within the macro-prudential framework and the increase in the policy rate, it has been assessed that the demand for Turkish lira instruments is increasing, and the monetary transmission mechanism is strengthening as loan and deposit interest rates rise together."

The summary stated that with the effect of the December interest rate decision, it is foreseen that the regulations aimed at increasing the share of Turkish lira deposits will continue to strengthen the transmission mechanism and improve the funding composition of the banking system, accompanied by monetary tightening.

The summary stated that the significant improvement in external financing conditions, the ongoing increase in reserves, the support of the rebalancing in demand to the current account, and the strengthening of domestic and foreign demand for Turkish lira assets have made a strong contribution to exchange rate stability and the effectiveness of monetary policy. It was also stated that direct foreign investments, which will focus on areas that will develop technology investments and production capacity through recent agreements, will support external financing in the coming period.

The summary noted the following:

"Turkey's 5-year credit default swap (CDS) premium, which reached the peak of this year at 703 basis points on May 22, 2023, due to the impact of domestic uncertainties, continued its decline from the 340 basis point level it had retreated to during the previous MPC period, falling to 284 basis points as of December 20, 2023. While the 1-month implied exchange rate volatility of the Turkish lira fell by 0.1 points during the current MPC period, the 12-month implied volatility rose by 1 point, reaching 7.8 percent and 23.8 percent, respectively, as of December 20, 2023. The declines in the risk premium and exchange rate volatilities since June have been accompanied by a total net portfolio inflow of 4.8 billion US dollars, with 2 billion US dollars to the Government Domestic Debt Securities (GDDS) market and 2.8 billion US dollars to the stock market. The CBRT's international reserves continue the strong upward trend they entered in June. The CBRT's gross international reserves, which fell from 128.8 billion US dollars at the end of 2022 to 98.5 billion US dollars at the end of May, rose to 142.5 billion dollars as of December 15, 2023. The upward trend in reserves has gained momentum recently, and a significant increase of 8.1 billion US dollars has been observed since the previous MPC period."

"The Committee anticipates completing the monetary tightening steps as soon as possible"

The summary recalled that the Committee decided to raise the one-week repo auction rate, which is the policy rate, from 40 percent to 42.5 percent.

Stating that the Committee will continue to determine its policy decisions in a way that will provide the monetary and financial conditions that will reduce the underlying trend of inflation and reach the 5 percent target in the medium term, taking into account the cumulative and delayed effects of monetary tightening, the summary reported that the pace of monetary tightening was slowed down by assessing that the level of monetary tightness required for the establishment of disinflation has been significantly approached.

The summary used the following expressions: "The Committee anticipates completing the monetary tightening steps as soon as possible. It has been assessed that the monetary tightness required for the permanent establishment of price stability will be maintained as long as necessary."

Emphasizing that the Committee has simplified the current micro and macro-prudential framework in a way that will increase the functionality of the market mechanism and strengthen macro-financial stability, the summary included the following assessments:

"Impact analyses regarding the regulations made by the CBRT are carried out by evaluating them with a holistic perspective, together with their reflections on inflation, interest rates, exchange rates, reserves, expectations, securities, and financial stability for all components of the framework in question. In this context, it has been assessed that a significant stage has been reached in the simplification process with the decisions taken. Recently, it is observed that excess liquidity has formed in the market due to the effect of components affecting liquidity, primarily the ongoing increase in international reserves. In addition to interest rate decisions, the Committee has decided to continue quantitative tightening by increasing the diversity of sterilization tools it uses to support the monetary tightening process. With these decisions, while the policy rate, which is the main policy tool, affects monetary and financial conditions and expectations, it is aimed to balance the excesses in Turkish lira liquidity and increase the effectiveness of monetary policy. Indicators regarding inflation and the underlying trend of inflation will be closely monitored, and the Committee will continue to use all tools at its disposal decisively in line with its main objective of price stability. The Committee will continue to take its decisions within a predictable, data-driven, and transparent framework."

News Source: 12punto