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CBRT passes the first test, policies to be more predictable with simplification

its first meeting under the management of the new Governor Mr. Naci Ağbal, in line with the expectations of the financial markets, Central Bank, raised the policy rate by 475 basis points to 15%. In addition to the increase in the policy rate, a simplification was also realized, establishing the “1-week repo rate” as the main policy tool.

ENGLISH NEWS 19.11.2020, 16:59
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CBRT passes the first test, policies to be more predictable with simplification
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its first meeting under the management of the new Governor Mr. Naci Ağbal, in line with the expectations of the financial markets, Central Bank, raised the policy rate by 475 basis points to 15%. In addition to the increase in the policy rate, a simplification was also realized, establishing the “1-week repo rate” as the main policy tool. The Central Bank has adapted to market conditions with the high rate of policy interest rate hike, strengthened its real interest position and increased predictability by directing all funding to a single rate.

In the previous period, the Central Bank increased the daily funding rate by using the late liquidity window as a main policy tool. Except for the September MPC meeting, the Central Bank, which did not make an official policy rate hike, was increasing the TRY funding cost by reducing or closing cheap funding channels and directing banks to the LLW, which was the highest lending rate. Although the 475 basis point increase seems like a dramatic increase, it actually points to a 20 basis point rate hike in practice as the TRY funding rate announced as of November 18 was 14.80%. However, since TRY funding, which was previously driven to different channels, will be shaped around the repo rate, there will not be a daily changing funding composition very frequently and at high intervals. This will increase the predictability of the Central Bank's policy and will ensure that policy moves to achieve goals.

With the policy rate hike, the real interest position has also been formalized. Although the October inflation rate was realized at the level of 11.9%, the Central Bank's year-end expectation was at the level of 12.1%. The weighted expectation of the market is an inflation in the band of 12-13% at the end of the year, and the upward risks to the current inflation continue as the effect of exchange rate increases on prices is not reflected by 100%. Increasing the nominal interest rate to 15% strenghtens our real interest rate to 2.8% compared to current inflation. The real interest position will remain at 2% in the year-end inflation that will be realized somewhere above 12%.

In the next steps, the inflation outlook, ensuring the disinflation process and the exchange rate movement will continue to be the main determinants. Stability of TRY will be important in terms of controlling inflation expectations. On the basis of orthodox monetary policy, this environment, where sub-instruments such as LLW will not be activated and the Central Bank policy will be determined directly, will positively affect the perception in terms of transparency, predictability and communication. We consider the harmonization of economic and monetary policy important in terms of issues such as maintaining credit growth in a controlled manner, establishing a balance in the growth / inflation equation and contributing to price stability. Although we see positive recent moves by economy decision makers such as stretching the derivative transaction limits and decreasing the withholding tax rate from deposits, we expect that such steps will continue with normalization steps such as removing the asset ratio and reserve requirement remuneration conditions.

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