CBRT's interest rate cut increases demand for foreign currency: Volatility in markets

The interest rate cut decision taken by the CBRT at the year's second Monetary Policy Committee (MPC) meeting was in line with market expectations. The 39 percent annual inflation rate announced by the Turkish Statistical Institute (TÜİK) on March 3 was a harbinger of the rate cut. Market analysts had predicted that the rate cut would be around 2.5 percentage points.

Markets have begun to await the third MPC meeting, which will be held on April 17. Market expectations have shaped around the view that interest rate cuts will continue in the coming months.

In global markets and international banks, the expectation that the policy rate will fall below 30 percent has come to the fore. Although the CBRT's year-end inflation target has been revised to 24 percent, it has been suggested that the perception of actual inflation in the markets is at higher levels. Experts noted that this situation could accelerate the shift from the Turkish Lira to foreign currency and gold.

While demand for foreign currency increased following the CBRT's interest rate decision, foreign currency deposits in banks have risen by over 8 billion dollars in the last two weeks. For a long time, demand for foreign currency had decreased due to high interest rates, and the tendency to shift to TL investments had increased.

With the interest rate cuts, the attractiveness of TL investments has diminished, and the orientation toward foreign currency has become more pronounced. This situation has created different effects for industrialists and exporters. While industrialists are satisfied with low interest rates, exporters were benefiting from the volatility in foreign exchange rates.

News Source: 12punto