With the U.S. Federal Reserve (Fed) announcement that it will not rush to launch an interest rate hike in addition to the European Central Bank's (ECB) and the Bank of Japan's (BoJ) expansionary policies - as well as the sharp decline in headline inflation in domestic markets in March - expectations for an interest rate discount in markets have increased. The markets' attention is fixed on the Central Bank of the Republic of Turkey's (CBRT) Monetary Policy Committee (MPC) meeting scheduled for April 20.
Economists suggest global conjuncture and domestic developments will enable the CBRT to launch an interest rate cut. They estimate that there might be a discount of 50 basis points in the marginal funding rate - the upper band of the interest rate corridor. Commenting on the matter, Ali Kırali - economic research and strategic planning director at Odeabank - said he estimates that a discount of 50 basis points will be made on the upper-band interest rate corridor. He also expects weekly repo and borrowing interest rates to be kept stable. Explaining that both financial conditions and the short-term recovery in the inflation outlook support this discount, Kırali said: "We do not think that the final declaration of the first CBRT meeting to be chaired by the new governor, Murat Çetinkaya, will significantly differ from previous ones in terms of economic evaluations and upcoming monetary policy stance."
Kırali stressed that a much more significant improvement is needed in inflation and core inflation outlook so that the CBRT can launch higher discounts in interest rates in the upcoming period. He said they might see some messages either in the final declaration to be released after the upcoming MPC meeting or the Inflation Report for April that can support their views. "On the other hand, possible discounts on the upper-band interest rate corridor will lead to more limited flexibility in liquidity policies and shrinkage in the interest rate corridor that, we think, will be very useful in periods where financial volatility is high. We will be observing its consequences on exchange rates in the periods where stress escalates rather than in the present time where global markets are calm. As a result, even if this meeting slightly differs from previous CBRT meetings in terms of the decision and messages to be released after the meeting, it will reflect the CBRT's institutional continuity like previous ones," he added.
İş Portföy Chief Economist Nilüfer Sezgin said there might be a discount of 50 basis points in the overnight lending rate during next week's MPC meeting, adding that a more significant discount can be launched when short-term downward risks in inflation are taken into consideration. She also said that the CBRT will not lean to sharply increase the discount that was confined to 25 basis points last month during the first meeting chaired by the new governor as such a sharp decline might confuse people. Sezgin stressed that one should not expect the CBRT to suddenly abandon the policies that it has so far implemented during the incumbency of the new governor, adding: "Discounts will continue in a temperate manner as they have always been."
According to Sezgin's statements, the CBRT might implement measures relating to required reserves to partly relieve the tightness in credit market conditions. "Since the previous MPC meeting held on March 24, there has not been significant change on the VIX and MOVE indices that are closely observed to see global volatility," she said. "There has been a slight increase on the VIX index and a slight fall on the MOVE index. Although we can say that there is not an environment that prevents the CBRT to move toward simplification, it is hardly possible to say that there is an environment that forces the central bank to accelerate its steps in a significant way." Furthermore, the three-month volatility indicator for the Turkish lira has revealed some relaxation since the MPC meeting in March - an important development that will enable the CBRT to continue the interest rate discount.
Sezgin also said inflation, which rapidly declined to 7.5 percent from 8.8 percent in March, might considerably drop in April again depending on changes in food prices. She said estimates that they made as of mid-April reveal that the headline inflation might drop below 7 percent. "Supposing that the CBRT, which prefers to follow price developments in advance, agrees with this view, we think that this development might be an important determinant before the interest rate meeting. We think that this unexpected rapid fall in inflation opens a space to reduce the upper band interest rate corridor by 100 basis points from the current 10.5 percent level," she said.