Inflation expected to prevent any change in interest rates

Published 26.10.2017 00:23

High interest rates, which are considered hurdles for real economy operations, are not expected to see any change at the monetary policy meeting of the central bank, which is looking to mitigate inflationary risks

Amid heated discussions on interest rates, which are as high as 18 percent in Turkey, the Central Bank of Republic of Turkey (CBRT) is scheduled to hold a Monetary Policy Committee today, and experts do not expect any change in rates since global and geopolitical developments triggered depreciation of the Turkish lira and the pressuring upward risks in inflation.

The other day, President Recep Tayyip Erdoğan held a meeting with representatives of 52 banks operating in Turkey at the Presidential Palace where the major topic of the meeting was high interest rates. He emphasized at the meeting that high rates block the efficient operation of economy as loans are the major source of investments.

While economy administration and banks are preoccupied with a discussion on the diversification of finance sources due to high rates and claim rates should be regulated in a more supportive way for the economy, the CBRT Monetary Policy Committee will hold a meeting in which it is expected to announce no change in interest rates once again.

Economists and analysts assert that the CBRT will continue its tight monetary policy for a while until inflationary pressures are mitigated. Bora Yılmaz, an economist at state lender Ziraat Bankası, said that the last five-year inflation average in Turkey was 8.3 percent while current inflation is above this average figure, therefore, the CBRT is keeping to its tight monetary policy.

The consumer price index (CPI) is, however, expected to drop in December, Yılmaz said. "Both the CBRT and the market are following inflation. In March, it is possible to see CPI fall to 7 percent. Yet, the core inflation does not seem to get looser due to the strict service prices." The expectation survey of the CBRT is sensitive to past data because it is shaped in accordance with actual inflation data, Yılmaz said. "If December inflation sees a drop as expected, an appropriate environment for a larger fall in inflation can emerge after the new year's price regulations are set."

Considering that improvements in inflationary predictions will be revealed after January, the CBRT will wait until March to introduce any change to its monetary policy, Yılmaz claimed, and emphasized that the weighted average cost of CBRT funding will keep its current levels for a while.

Halk Yatırım Research Director Banu Kıvci Tokalı indicated that in order to see any change in the CBRT's tight monetary policy, improvement signals in inflationary dynamics are necessary.

In a global context swayed by uncertainties, Tokalı said no expansionary monetary policy is expected from the CBRT. "The improvement in global normalization and eased inflation will facilitate some expansion in the weighted average cost of CBRT funding."

Denizbank Investment Services Strategy Director Orkun Göbek said that the CBRT will take no action on interest rates in its October meeting in accordance with the general market expectations.

Gödek highlighted that risk perception of money markets across the global risk appetite has started to distort since mid-September. Therefore, the current advantage of the weighted average cost of CBRT funding cannot help prevent any depreciation in the Turkish lira.

Rather than exchange rate levels, volatility and predictability of the Turkish lira is of critical importance for inflation, Gödek said. "In light of the recent movements, the monetary expansion expected from the CBRT in the first quarter of 2018 can be delayed until the second quarter of the year.

Underscoring that inflation is the determinant element in the CBRT's monetary policy, Gödek said one of the two bases for the CBRT's monetary policy implemented since Jan. 12 is inflation.

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