ANALYSIS: CBRT Bold Presentation: Additional Monetary Adjustment Will Be Provided If Needed

The Central Bank of Turkey (CBT) was published on Thursday April 1 and made presentations made at investor meetings. The presentation emphasized that additional monetary adjustments will be made if necessary. So if headline inflation or expectations rise, the CBRT will do a further rate hike. This is a compromise and is very similar to the statements made under former President Naci Ağbal. So we are still looking for an answer to the question why Ağbal was fired. But that is not the point. The fact that Professor Kavcıoğlu, who took office to reduce interest, was criticized within a week in the face of market disturbances, gives us clues about how President Erdoğan will behave in the future.

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In the presentation, it was indicated that the restrictive monetary policy stance will be maintained, taking into account the objective set for the end of 2021. (Forex)

The presentation indicated that the restrictive monetary policy will continue until strong indicators point to a permanent drop in inflation and price stability. “An additional monetary adjustment will be provided if necessary.” It was said.

The highlights of the presentation are as follows:

“Economic activity is on a solid trajectory.

Economic activity is expected to pick up in services and related sectors as constraints associated with the pandemic ease.

Due to the cumulative effects of high credit growth during the pandemic period, strong domestic demand and import prices continue to negatively affect the current account balance.

The conditions of domestic demand, the effects of accumulated costs, especially the effects of the exchange rate, the increase in international prices of food and other raw materials and high inflation expectations continue to negatively affect the behavior of prices and the inflation outlook.

The decelerating effect of the tightening of monetary policy on inflation expectations for credit and domestic demand continues to be more serious.

The gradual decline in demand and cost factors is delayed by the recent upward trend in loan growth and rising import costs.

Taking into account the upside risks to inflation expectations, price behavior and the medium-term inflation outlook, the CBRT decided to implement an additional strong and anticipated monetary adjustment.

The restrictive stance of monetary policy will be firmly maintained, taking into account the target set for the end of 2021.

Tight monetary policy will be maintained until solid indicators point to a permanent drop in inflation and price stability. “

Inflation will not indicate “price stability” this year. We expect the CPI, which will rise to 18-19% annually in April-May, to close the year at 15% even under the most optimistic conditions. If LT depreciation cannot be avoided, or inflation of imported goods rises, this forecast may be exceeded.

So Professor Kavcıoğlu will have to raise interest rates like his predecessor. This time, “Did you get permission from President Erdogan?” The question is unfounded, because Kavcıoğlu was personally appointed by Erdoğan to fulfill a mission. Therefore, pointing to a rate hike is a sign that Erdogan could also change his policies to avoid devaluation.

This signal is very important because we can see that Erdogan “meets the requirements” on many important issues, from reconciliation with the US-EU tomorrow, to making peace with the Arab countries and Israel, to early elections.

Or… to save time on this presentation, and if the dollar / TL stabilizes around 8.00, the interest rate cuts start again. In this scenario, would people forgive Erdogan?


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