Critical turning point for CBRT: The policy mechanism to have its first serious test

Tomorrow, we will follow the decision from the Central Bank meeting in an environment where it is clear that the upward pressure in inflation will continue in the coming months, we bear a higher risk cost compared to before 19th March, and we will perhaps need higher interest rates to convince the markets.

Tomorrow, we will follow the decision from the Central Bank meeting in an environment where it is clear that the upward pressure in inflation will continue in the coming months, we bear a higher risk cost compared to before 19th March, and we will perhaps need higher interest rates to convince the markets. Due to the reshuffle that occurred on March 19 and the apparent reason for this, it is normal for market actors and investors to increase the risk perception of the implementation of the Central Bank policies. Because, while the policies of the hawkish CBRT Governor Ağbal were in the maturation phase and the results will be seen in the coming months, the route of the monetary policy for 2-3 years was more clear. After seeing the peak of inflation and declining, there would be an opportunity to cut interest rates.

 

Communication with the markets is of high importance, as it is the first meeting under the management of Şahap Kavcıoğlu after the management change, after the former Central Bank President Naci Ağbal raised the interest rate by 200 basis points in the March MPC. The reaction of Turkish lira assets and markets after the CBRT's reshuffle was an expression of uncertainty regarding the implementation of monetary policies. On the other hand, Kavcıoğlu signaled that there will be no policy change for the near term, stating that he will continue to apply interest rates above inflation and that monetary policy will remain tight.

 

Inflation rose to 16.2% in March and the lira lost more than 10% after Ağbal's dismissal. We will also see that inflation will continue to increase due to the PPI, rising raw material prices and the additional depreciation in TRY. We think that early-term interest rate cuts will further increase the risks on inflation. For sustainable growth, inflation must first be addressed; a fall in inflation will already provide the necessary opportunity to cut interest rates and achieve growth. For this reason, we believe in the necessity of continuation of tight monetary policy in the foreseeable future. We do not expect an interest rate change at the April 15 MPC. In line with the increasing risks in the inflation outlook and the prevailing market conditions, the option of additional tightening may be included in the policy statement even if it does not take action.

Tomorrow, we will follow the decision from the Central Bank meeting in an environment where it is clear that the upward pressure in inflation will continue in the coming months, we bear a higher risk cost compared to before 19th March, and we will perhaps need higher interest rates to convince the markets. Due to the reshuffle that occurred on March 19 and the apparent reason for this, it is normal for market actors and investors to increase the risk perception of the implementation of the Central Bank policies. Because, while the policies of the hawkish CBRT Governor Ağbal were in the maturation phase and the results will be seen in the coming months, the route of the monetary policy for 2-3 years was more clear. After seeing the peak of inflation and declining, there would be an opportunity to cut interest rates.

 

Communication with the markets is of high importance, as it is the first meeting under the management of Şahap Kavcıoğlu after the management change, after the former Central Bank President Naci Ağbal raised the interest rate by 200 basis points in the March MPC. The reaction of Turkish lira assets and markets after the CBRT's reshuffle was an expression of uncertainty regarding the implementation of monetary policies. On the other hand, Kavcıoğlu signaled that there will be no policy change for the near term, stating that he will continue to apply interest rates above inflation and that monetary policy will remain tight.

Inflation rose to 16.2% in March and the lira lost more than 10% after Ağbal's dismissal. We will also see that inflation will continue to increase due to the PPI, rising raw material prices and the additional depreciation in TRY. We think that early-term interest rate cuts will further increase the risks on inflation. For sustainable growth, inflation must first be addressed; a fall in inflation will already provide the necessary opportunity to cut interest rates and achieve growth. For this reason, we believe in the necessity of continuation of tight monetary policy in the foreseeable future. We do not expect an interest rate change at the April 15 MPC. In line with the increasing risks in the inflation outlook and the prevailing market conditions, the option of additional tightening may be included in the policy statement even if it does not take action.

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