CBRT raises policy rate by 250 basis points to 42.50 percent, in line with expectations

The Central Bank's Monetary Policy Committee (MPC), meeting for the 7th time under the chairmanship of Hafize Gaye Erkan, has announced the highly anticipated final interest rate decision of the year.

Accordingly, the Central Bank's Monetary Policy Committee raised the December policy rate by 250 basis points to 42.5 percent, in line with expectations.

With this move, the Central Bank has implemented a total of 34 percentage points of interest rate hikes in 7 months.

The Central Bank had previously raised interest rates by a total of 3,150 basis points across six meetings: 650 in June, 250 in July, 750 in August, and 500 each in September, October, and November. The Central Bank's next meeting will be held on January 25.

CENTRAL BANK'S DECISION TEXT

The following statements were included in the Central Bank's Monetary Policy decision text:

"Headline inflation, which recorded a limited increase in November, is in line with the outlook presented in the latest Inflation Report. The current level of domestic demand, stickiness in services prices, and geopolitical risks keep inflationary pressures alive. On the other hand, recent indicators suggest that the rebalancing in domestic demand continues as monetary tightening reflects on financial conditions. The Committee also assesses that a limited improvement in inflation expectations and pricing behavior has begun. The significant improvement in external financing conditions, the continued 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 contribute strongly to exchange rate stability and the effectiveness of monetary policy. In this context, the decline in the underlying trend of monthly inflation continues.

'TO BE COMPLETED AS SOON AS POSSIBLE'

The Committee has slowed the pace of monetary tightening, assessing that the level of monetary tightness required to establish disinflation has been significantly approached. The Committee anticipates completing the monetary tightening steps as soon as possible. It was assessed that the monetary tightness required for the permanent establishment of price stability will be maintained as long as necessary.

'QUANTITATIVE TIGHTENING WILL CONTINUE'

The Committee is simplifying the current micro- and macroprudential framework in a way that will increase the functionality of the market mechanism and strengthen macro-financial stability. While it is assessed that loan interest rates are consistent with the targeted level of financial tightness, it is anticipated that 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. In addition to interest rate decisions, the Committee will continue quantitative tightening by increasing the variety of sterilization tools it uses to support the monetary tightening process.

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.

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."

WHAT WERE THE EXPERTS EXPECTING?

The forecasts of experts regarding today's critical decision were as follows:

REUTERS SURVEY

All 12 economists participating in the Reuters survey expected a 250 basis point hike from the 40 percent policy rate.

In the survey, the median of the forecasts of 11 economists who answered the question regarding the level of the policy rate in June 2024 was 45 percent.

The survey also anticipates that interest rate cuts could begin before the end of 2024. The median of economists' policy rate forecasts for the end of 2024 is 37.5 percent. Forecasts ranged between 35 percent and 45 percent.

BLOOMBERG HT SURVEY

The median expectation of the 24 institutions participating in the Bloomberg HT survey was that the interest rate would increase by 250 basis points to 42.5 percent in December. The maximum expectation was 45 percent, and the minimum expectation was 42.5 percent.

On the other hand, 20 institutions shared their peak interest rate forecasts for 2024 during this survey period. Accordingly, the market's peak forecast for the policy rate in 2024, as of December, was 45 percent. In the 2024 peak forecasts, the highest expectation was recorded at 45 percent, and the lowest expectation was at 42.5 percent.

Additionally, 17 institutions shared their interest rate expectations for the end of 2024. Accordingly, the policy rate is expected to be at 35 percent by the end of 2024. While the maximum expectation for the interest rate at the end of 2024 was 45 percent, the minimum expectation was 30 percent.

Finally, survey participants were also asked about their expectations for the first interest rate cut. Accordingly, 10 out of 15 institutions that shared their forecasts expected the first move from the Central Bank in the third quarter of 2024.

FOREKS SURVEY

The median expectation for the CBRT's December meeting was that the interest rate would be increased by 250 basis points and raised from 40 percent to 42.5 percent.

All 22 economists participating in the Foreks Haber survey predicted that the interest rate would be increased. The highest forecast was 45 percent, while the lowest forecast was 42.5 percent. 21 of the 22 economists predicted a 250 basis point hike, while 1 predicted a 500 basis point hike.

In the survey, the median interest rate forecast of 15 economists who provided their views for the end of 2024 was 40 percent. The maximum expectation for year-end interest rate forecasts was 50 percent, and the minimum expectation was 25.5 percent.

AA FINANCE SURVEY

The AA Finance expectation survey for the CBRT interest rate meeting was concluded with the participation of 14 economists.

The median of the economists' expectations regarding the change in the policy rate was a 250 basis point increase.

According to the survey results, the policy rate expectations of economists who predicted an increase between 250 and 500 basis points ranged between 42.50 percent and 45.00 percent.

MORGAN STANLEY, GOLDMAN SACHS AND DEUTSCHE BANK

US-based investment bank Morgan Stanley wrote a report last week regarding its Turkey forecasts. Bank economists stated that they expect to reach a final interest rate of 45 percent with an additional 250 basis point increase to be carried out in January.

Goldman Sachs announced in an analysis published in recent weeks that they expect the CBRT to raise the policy rate to 42.50 percent with another 250 basis point increase and for the tightening process to be completed.

Deutsche Bank also estimated that the CBRT would raise the interest rate twice by 250 basis points each to 45 percent in January. Analysts predicted that the CBRT would go for an interest rate cut in the last quarter of 2024 and pull the policy rate down to 40 percent by the end of 2024.

SOCIETE GENERALE

Societe Generale Central and Eastern Europe, Middle East, Africa Strategist Marek Drimal predicted that the CBRT would raise the policy rate by 250 basis points to 42.50 percent.

Stating that the pace of monetary tightening could slow down and the tightening cycle could be completed in a short time, Drimal expressed that as a result of this guidance, the CBRT could reduce the pace of tightening by half at the December meeting.

News Source: 12punto