Ata Özkaya: The risk of the war spreading could change the behavior of central banks

The war between Israel and Palestine that began on October 7 in the Middle East has heightened tensions in the region. Pricing behaviors in global markets, commodities, and currency markets have changed. While strong gains were seen in gold and oil, stock markets followed a downward trend. So, in light of new developments, what will the Central Bank's interest rate decision be?

IS THE INTEREST RATE HIKE OVER, OR WILL IT CONTINUE?

In its last meeting, the TCMB raised the policy rate by 500 basis points to 30 percent. So, what are the expectations for the new decision to be announced on Thursday? Galatasaray University faculty member Assoc. Prof. Dr. Ata Özkaya, who made important statements on the subject, said the following:

“The risk of the war spreading could change the behavior of central banks. There are no significant signals regarding this for now; it only becomes a reality when it is reflected in this decision. The possibility that our central bank will act cautiously in the interest rate decision it will take is strengthening. If we had not entered such a conflict environment, it would have been somewhere between 250 and 500 basis points. Now that it has become clear that we need to act cautiously, sudden expenditures may arise. I evaluate that the Central Bank will act cautiously in its interest rate decision so that excessive tightness does not occur in the country's economic situation.

I think it will decide on a figure between 250-350 basis points. If the intensity of the conflicts increases and spreads to the region, a sentence like 'we will review monetary policy again' may come. I currently evaluate that there will be an interest rate hike of less than 5 percent in the decision.

When we look at the statements of the Minister of Treasury and Finance, Mr. Mehmet Şimşek, if we accept the conflicts as data, Mr. Şimşek showed that we are close to the real interest rate. This means the following: Since there is an expected inflation of 33 percent, the Central Bank has not yet updated this. If we interpret Mr. Şimşek's statements as 'anything above 33 percent is a positive real interest rate for us,' there could be an increase of around 3-3.5 percent.

WILL THE PACE OF INTEREST RATE HIKES SLOW DOWN?

That is how I evaluate it. In such an environment, markets may need liquidity. A break in the debt-credit chain may occur. When risk increases in the market, while it reflects on investment decisions in the medium and long term, it can affect the debt-credit chain in the short term. Central banks need to ensure they provide a certain liquidity guarantee. They announce this directly through the interest rate decision. We last saw this during the uncertainty of the coronavirus environment.

WHAT IS THE REASON FOR THE SHARP MOVEMENT IN GOLD?

The US President and the British Prime Minister coming to the region, the statements—we are not yet hearing statements that the problem will be fully resolved. We are hearing more partial statements, which made financial markets perceive that the conflicts could spread. That is why we are seeing a slight decline today. Last week, the markets priced in extremely intense statements. Now, until a new statement comes, we will observe a slightly downward trend and stabilization.”