The issue with policy rate expectations ahead of the Turkish Central Bank decision

The issue actually seems to stem from the significantly decreasing rate of increase after the initial 650 basis points.

For example, it could have followed a pattern of 650-500-350-200, decreasing incrementally. There are assumed limitations to this in the economy. However, the initial starting rate indicates that there is no constraint apprehension.

Of course, if unpredictability arises, the Central Bank has an excuse. The members of the Monetary Policy Committee (MPC) hadn't been changed in the June and July meetings. Steps may be taken in the August meeting, the first of the new MPC, to address the start of the decision strategy. It's important to note that decisions that would imply the civilianization of Exchange Rate Protected Deposits have just been made, and this context should not be forgotten when the August MPC convenes.

Hence, the decisions thus far simply indicate the Central Bank's tightening (interest rate increasing) direction, and it can be said that the strategy for further increases will be shaped by the new MPC.

In this scenario, regardless, the August meeting will be of historical significance for the short term. Most likely, with this meeting, the character of the strategy for increases until July 2024, a span of one year, will become clear, and the cycle will gain predictability.

If an increase of less than 150 basis points occurs, the past two months can be considered part of the cycle, but it's assessed that the cycle will be too short. This brevity signifies that a sufficient interest rate won't be achieved as per the rule. This is likely why the market is predicting a 250 basis point increase.

Likewise, if they repeat the 150 basis point increase, the past two months won't be wasted, and they'll count towards the cycle, but there will be larger gains. In this case, it's evident that a fixed-rate increase cycle will be followed. And 150 basis points is also my prediction.

If this occurs, predictability will be established, and it will be known that the policy rate will reach 34% in July 2024. In my previous writing, I evaluated the main strategy as half being from us and half from the conjuncture in the fight against inflation. Therefore, a 34% policy rate for July 2024 doesn't seem inconsistent. With the Central Bank's inflation forecast for 2024 at 33%, this rate also implies positive real interest.

Some degree of uncertainty might have been effective, but if returning to the rule, August seems to be the culmination of this. Preparations should be completed before September begins.

July 2024 will be a turning point where the base effect will favor several consecutive months. Simultaneously, this date could be seen as an intersection where the tightening stance of the conjuncture ends or softens.

If the decisions of the past two months aren't invalidated and if my prediction of a 150 basis point increase holds, the criticism of inexperience will be directed at the market predicting a 250 basis point increase.

The Central Bank is set to hold its August meeting this week. Expectations are pointing towards a 250 basis point increase in the policy rate, bringing it up to 20%.

While expressing this expectation seems normal, there's an issue. The expectation shouldn't have shaped up this way. Let me explain.

Since the change in the leadership of the Central Bank, two meetings have taken place, one in June and the other in July. In the first one, which was held in June, there was a 650 basis point increase. In July, there was a 150 basis point increase.

Central banks establish predictability through decisions of increasing rates, decreasing rates, or maintaining them. For example, in a cycle of rate increases, the increments can be kept the same each month, or they can gradually decrease after the initial increase until the cycle concludes. Alternatively, small steps followed by larger ones can be taken to reach the peak of the cycle. The strategy chosen depends on the prevailing conditions.

The new economic management appeared to have established a decreasing-rate cycle by first increasing the policy rate by 650 basis points and then by 150 basis points. However, it seems they were unable to implant this idea in the market. This is evident because the expectation for August has taken shape at a higher rate compared to the previous rate increase.

In its current state, the market's August prediction characterizes the Central Bank as unpredictable. If the market's prediction doesn't hold true, the inability to read the cycle and meet predictions will be interpreted by the market not as their own but as the Central Bank's inexperience.