CBRT takes the action on the text: Signs of early easing with a more dovish text

It was certain that the Central Bank's current decision would not be the scene of a hasty move in terms of lowering interest rates.

It was certain that the Central Bank's current decision would not be the scene of a hasty move in terms of lowering interest rates. The communication of this is already Mr. Kavcıoğlu had done it with the messages he gave to the markets after he took office. At this point, there was no expectation that Naci Ağbal's interest rate hike of 200 basis points on March 18 would be withdrawn immediately. However, the changing market conditions due to the underlying trend of inflation and and the higher cost of risk, we had to endure the weighing risks would have caused us to need higher interest rates at the point of persuasiveness of the policy. For this reason, the presence of statements stating that the monetary policy will continue in a tight level was important in the policy statement. When we look at the policy statement, we see that there are important changes regarding the phrases in question.


The highlights of the Central Bank's current action and policy statement;


·        According to the Central Bank Monetary Policy Committee's statement, the benchmark one-week repo rate remained at 19%. (Market median expectation and our expectation were in this direction.)

·        While the "tight monetary stance" continues in the context of today's decision, the commitments that the policy will be kept tight for a long time and that additional tightening may be made if necessary, were removed from the policy statement.

·        In order to maintain a strong inflation-lowering effect, the policy rate will continue to be set at a level above inflation until the main indicators point to a permanent decline in inflation and the medium-term 5% target is reached.

·        Demand and cost factors, supply constraints in some sectors and high inflation expectations continue to pose risks on pricing behavior and inflation outlook.


The removal of the phrases of "prolonged tight stance in monetary policy" and “additional tightening” from the policy text shows that the monetary policy stance in the future may become more dovish. The main concern of the market was that before the consequences of the tight policy were fully seen, the decrease in inflation would make the Central Bank rush to cut interest rates quickly. It would have required to increase the interest rates more rapidly in the following period with the macroeconomic and financial effects that would create a faster reduction in interest rates than inflation. Similarly, this has been experienced in recent policy practices. The changes in the text show that the monetary policy tightening is periodic and the policy will sooner or later be compatible with Kavcıoğlu's dovish thoughts. In this case, it may be somewhere in 3Q21 to start cutting interest rates.


As a result; economic conditions prevent the Central Bank from loosening. The general view of inflation indicates that the increase will continue. Factors such as cost, raw material and energy prices, additional 10% depreciation in TRY will continue to feed inflation and cause it to be higher than previous estimates. In this case, the protection area created by the tightening towards the 19% policy rate will shrink a little more. The Central Bank's end-of-year expectation of 9.4% is no longer valid and we will see that the expectations will be revised upwards in the Inflation Report on April 29th. In terms of real interest rates, the preferred criteria point to the uncertainty about how to weigh “actual inflation and expected inflation”.

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