CBRT cornered ahead of interest rate decision: 'Ammunition appears to be running low'

The final interest rate decision before the local elections will be announced tomorrow.

Although the interest rate hike cycle was paused following the appointment of the new Central Bank Governor Fatih Karahan, the deterioration in inflation expectations and rising demand for foreign currency have made an interest rate hike inevitable.

According to a report by Havva Gümüşkaya from BirGün; there are also opinions being voiced that the economic management has no choice but to raise interest rates in the short term to stabilize the foreign exchange rate.

In February, monthly inflation came in higher than estimated, and year-end forecasts have begun to drift away from the Central Bank's (CBRT) expectations. Despite the inflation target of 75 percent for May and 36 percent for the end of the year announced by the Central Bank, markets are expecting a figure above 44 percent. While the steady depreciation of the Turkish Lira has gained momentum in recent days, the spread between the interbank market and the Grand Bazaar has widened to 1 TL again. The dollar is trading at 32.34 TL in the interbank market and over 33 TL in the Grand Bazaar.

RAPID DECLINE IN RESERVES

The economic management, which exhausted all options and spent reserves to keep the dollar below 20 TL until the May 28 elections, has resorted to the same method before the local elections. The increase observed in the exchange rate in recent weeks and the decrease in the CBRT's net foreign exchange reserves have reached notable levels. The CBRT's net reserves, excluding swaps, fell by 6.1 billion dollars in the week of March 8. The decline since the beginning of the year has reached 14.4 billion dollars. Net reserves have fallen back to minus 53.9 billion dollars. While the country went into the May 14, 2023 elections with net reserves at the level of minus 57.8 billion dollars, it is expected to enter the March 31 local elections at a level close to this.

EXPECTATION OF A 500 BASIS POINT HIKE

The interest rate hike cycle, which began with the 'return to rational ground' after the May elections, was suspended in January when the policy rate was raised to 45 percent. In the monetary policy assessment note prepared by the TEPAV Macroeconomics Working Group, it was stated that the policy rate should be increased by 500 basis points, adding: "Strengthening steps towards transforming the ongoing process of returning to rationality in the economy into a comprehensive program must be taken as soon as possible. The repo rate should be increased by 500 basis points, and it should be stated that additional tightening may be implemented depending on the data. In order to eliminate imbalances in monetary policy, regulations should be made to ensure that the increase in the policy rate is sufficiently reflected in deposit rates and that the credit market functions more healthily; the operation of the transmission mechanism should be facilitated."

TIGHT STANCE MESSAGE MAY BE GIVEN

Istanbul Kültür University Faculty Member Prof. Dr. Cem Başlevent stated that citizens' expectations are negative, saying, "A repeat of what happened last year is expected. That is why demand for foreign currency and gold has emerged. Considering that there are only 2 weeks left until the elections, it can be expected that they will give a message of a tight stance by making a certain interest rate hike this Thursday."

Touching upon the decrease in the CBRT's reserves, Başlevent said, "The ammunition to be used seems to have diminished. I do not think they would prefer net reserves, excluding swaps, to fall to their lowest levels in history. After the elections, high policy rates and high deposit interest rates will continue to be seen at least until annual inflation begins to fall due to the base effect."

Reminding of the date given by Minister Şimşek for the decline in annual inflation, Başlevent stated, "A date was also given, saying 'Annual inflation will start to fall on July 3.' The President also made a statement supporting his economic policies. Therefore, we are entering a period where the fight against inflation will continue strictly, which means a more difficult life for low-income earners."