Erhan Aslanoğlu predicts the Central Bank's interest rate decision: 'It won't be a surprise'

The Central Bank of the Republic of Turkey (TCMB) will announce its April interest rate decision tomorrow following the Monetary Policy Committee (PPK) meeting.

In his article written for ekonomim, Erhan Aslanoğlu shared his forecast on how the Central Bank will announce the interest rate. Aslanoğlu also touched upon the fight against inflation and mentioned the importance of the upcoming decision.

Aslanoğlu's article is as follows:

"One of the most important agenda items for the markets this week will be the Central Bank's April monetary policy meeting. Even if the incoming messages suggest a higher probability of tightening continuing through liquidity measures rather than an interest rate hike, it would not be much of a surprise if the Central Bank raises the policy rate.

Those saving in TL have been losing for a long time

One of the most fundamental questions for the markets following the elections is whether economic policies will gain new momentum in the fight against inflation. Here, of course, monetary policy has a distinct importance. Monetary policy is the locomotive of the fight against inflation. Until a short while ago, we all observed that the monetary transmission mechanism was not working well and that, despite interest rate hikes, the desired point in the fight against inflation could not be reached. When we look at the real returns of financial investment instruments published last week, we can clearly see how weak monetary policy has remained. Even if the negative real interest rate has started to decrease in recent times, it must be stated that in an environment where savers investing in Turkish Lira have been punished and have experienced major losses not just for the last year, but for almost the last 2.5 years, even if a reward emerges in the form of a positive real interest rate, it will not be immediately and rapidly successful in changing the behavior of the saver.

After a long interval, real interest rates on TL investment instruments (deposits, bond-bill yields...) seem to have turned positive. With the recent interest rate hikes, interest rates of 50% and above, even paid on limited savings, have begun to present a real interest rate that could be called strong at a point where 12-month inflation expectations are at 36%. This situation has started to give its first signals regarding a shift towards saving. Although the Bloomberg HT Consumer Confidence Index has increased, the Consumption Tendency Index, one of the sub-items of the index, has shown a sharp decline. We see a similar trend in the TurkStat-TCMB Consumer Confidence Index. If this trend continues and strengthens, a clearer weakening in domestic demand and the possibility of achieving a stronger result in the transmission mechanism of monetary policy will arise.

KEEPS INFLATION PERCEPTION HIGH

Another factor regarding whether monetary policy will show its effectiveness will be the inflation expectations of households. Although the Central Bank's survey of market participants points to an inflation expectation of between 35-40% for the 12-month period, there is also the possibility that the service sector inflation, which approaches 100% in official figures, creates hesitation in the eyes of the citizen regarding whether a real return is being formed. The boycott initiated last week against the food and beverage sector shows how effective service prices are in society's perception of inflation. For this reason, monetary policy needs to reach its strongest point rapidly and reduce the pass-through of possible developments, such as increases in exchange rates or oil prices, to inflation by cutting demand. We believe that a possible interest rate hike at tomorrow's TCMB monetary policy meeting could be positive in terms of increasing the success chance of the fight against inflation. Demonstrating this determination will further increase expectations of a slowdown in the economy. Unfortunately, a weakening of domestic demand for a period seems to be an important prerequisite for us to exit the inflation spiral in the fight against inflation. Providing these conditions is necessary for the fight against inflation, but of course not sufficient. As has been frequently voiced in recent days, it is of great importance that the public sector implements strong austerity measures and increases the fight against the informal economy, especially in fiscal policy. Political determination and the provision of this trust stand before us as another important condition. The fact that the increasing geopolitical risks in the world do not grow and that no imported inflation pressure comes from there also maintains its place in this struggle as another important element.

In summary, we are on a difficult path. If we can enter it, it is also of great importance to protect companies and households that will be further strained on this path for reasons beyond their control, and to try to solve the income distribution problem"