Details from Turkish Central Bank's decision to cut interest rates

On Thursday, the Central Bank Monetary Policy Committee (MPC) announced the interest rate decision during the first meeting of the year. According to the ruling, The MPC reduced the one-week repo auction interest rate, which is the key rate, from 12% to 11.25%. Thus, the Central Bank reduced the interest rate by 1275 basis points, over 5 consecutive meetings.

What does the wording of the decision indicate?

In addition to the interest rate decision, another factor to which economists pay most attention is the text of the decision. The difference between the previous text and the wording used is of great importance for the Bank's communication strategy. So what does the text contain?

First of all, the emphasis is on continuing the trend of resumption of economic activity. It is indicated that the recovery of the economy will continue together with the disinflation process, that is to say a further decline in inflation rates and the improvement of financial conditions. The expansion policies of the central banks of the developed countries should continue. In other words, the monetary policies of these banks should not pose a risk to the exchange rate. Certain expressions which were absent in the previous text but in the last one were also noteworthy. For example, in addition to protectionism and uncertainties set out in the previous text, this time, geopolitical developments and the effects they can have on commodity prices are mentioned. In other words, the message that the impact of geopolitical developments on oil prices will be closely monitored. The phase 1 trade agreement signed between the United States and China the day before seems to be included in the text as "a partial improvement in expectations regarding world trade".

It was indicated in the previous text that a general improvement in inflation expectations had been observed, while additionally, the reference to the fall in country risk premiums was redefined.

WHAT ARE THE FACTS OF THE REAL ECONOMY?

The text can be summarized as there are favorable conditions for the Bank to continue to lower interest rates and the changing inflation outlook supports the updating process. This is good news. Because the real sector funding of favorable interest rates and access to finance are issues of paramount importance for Turkey. In this regard, each drop in interest rates is essential to be competitive on both the producer and export sides. After the attack on the exchange rate in August 2018, we find that the braked banks have again opened their credit channels since the middle of 2019. Of course, the public banks shouldered the burden, but in a large economy such as Turkey, we need to stress once again that in order to implement a public service, licensed private equity banks have slowed down their brakes mechanism.

CONTINUE WITH RATE CUTS?

Perhaps one of the most important wordings of the MPC decision text is the assessment that the course of inflation is broadly in line with year-end forecasts. The Bank's inflation forecast at the end of the year is 8.2%. If we move from here, we can say that it is possible to see a single-digit interest rate after a few meetings. In other words, we can say that the interest rate cuts will continue in accordance with the disinflation process and the balanced evolution of the exchange rate.