The Central Bank of the Republic of Turkey (CBRT) Monetary Policy Board (PPK) did not change interest rates at its first meeting of the year. The policy rate of 14 percent was held steady. General expectation in the market; It was that the CBRT would keep interest rates steady to monitor the impact of the steps taken after a total interest rate cut of 500 basis points to support economic growth since September.
Stating that the disinflationary process is predicted to begin with the elimination of the base effects of inflation, the CBRT stated that “The cumulative effects of the decisions taken are closely monitored and a comprehensive policy framework review process is carried out that prioritises the Turkish lira in all policy instruments of the CBRT in order to reshape price stability on a sustainable basis.”
After the Central Bank’s interest rate decision, which is in line with market expectations, exchange rates fell as the first reaction. The dollar/TL, which has been at 13.50 for about a week, fell to 13.25 just above the 13.40 it was in before the decision. Euro/TL was withdrawn below 15.15 from 15.25.
“The disinflationary process will begin with the end of the base effects”
The post-PPK assessment is as follows: New variants and increased geopolitical risks in the pandemic keep the downside risks to global economic activity alive and lead to increased uncertainties. The recovery in global demand, the high trajectory of commodity prices, supply constraints in some sectors and the increase in transportation costs are leading to higher producer and consumer prices internationally. While the effects of high global inflation on inflation expectations and international financial markets are closely monitored, the central banks of developed countries assess that the rise in inflation may last longer than expected due to rising energy prices and supply-demand disparities. In this context, although there is a divergence in the monetary policy communications of the central banks of developed countries due to the differentiating outlook between countries in the expectations of economic activity, labor market and inflation, central banks maintain their supportive monetary stances and continue their asset purchase programs.
Capacity utilization levels and other leading indicators indicate that domestic economic activity remains strong with the positive impact of external demand. While the share of sustainable components in the composition of growth increases, the current account balance is projected to be excessive in 2022. The strengthening trend in the current account balance is important for the price stability target and commercial and personal loans are closely monitored in this context.
Inflation has risen in the near term; Supply-side factors and demand developments such as pricing behaviors indexed to exchange rates due to unhealthy price formations in the foreign exchange market, increases in global food and agricultural commodity prices and disruptions in supply processes are effective. The Board foresees that the disinflationary process will begin with the elimination of the base effects of inflation, together with the steps taken to establish sustainable price stability and financial stability. In this context, the Board has decided to keep the policy interest steady. The cumulative effects of the decisions taken are closely monitored and a comprehensive policy framework review process is carried out in all policy instruments of the CBRT that prioritizes the Turkish lira in order to reshape price stability on a sustainable basis.
The CBRT will continue to use all the tools at its disposal decisively until strong indicators point to a permanent decrease in inflation are formed for the main purpose of price stability and reach the medium-term target of 5 percent. The stability to be achieved at the general level of prices will positively affect macroeconomic stability and financial stability through the decrease in the country’s risk premiums, the continued trend of reverse currency substitutes and increases in foreign exchange reserves, and the permanent decline in financing costs. Thus, the appropriate basis will be established for the healthy and sustainable continuation of investment, production and employment growth.
The Board will continue to make its decisions in a transparent, predictable and data-driven framework.