Foreign investment banks received a ‘determination’ message from the Central Bank

While the decline in Turkiye’s 5-year credit risk premium (CDS) continues with the tightening steps of the Central Bank, in the analyzes of foreign investment banks regarding the Inflation Report presentation of Central Bank Governor Erkan, the emphasis on determination that “tightening will continue until a permanent and significant decrease in inflation is achieved” came to the fore.

The decline in Turkiye’s CDS accelerated again as CBRT President Hafize Gaye Erkan’s statements in the last Inflation Report presentation again demonstrated their determination to fight inflation. Turkiye’s CDS, which was at 700 basis points in May, fell to around 365 basis points on Friday, November 3, seeing its lowest level in the last 2 years.

Turkiye’s CDS fell below the 400 level for the first time in 2 years after the statements of Erkan, who appeared before the press for the first time at the Inflation Report meeting on July 27, were received positively in the markets.

CDS decline reflecting the increase in foreign investor interest in TL assets; Despite the ongoing geopolitical risks, the CBRT’s determined steps towards establishing disinflation, Turkiye’s continued increase in access to external financing continue with positive signals from the meetings held with foreign investors.

“CBRT signaled further tightening”

In their analysis of Erkan’s Inflation Report presentation on November 2, foreign investment banks emphasized the determination that “tightening will continue until a permanent and significant decrease in inflation is achieved.”

In the evaluation regarding Turkiye in the weekly report of Morgan Stanley, an investment bank headquartered in the USA, for CEEMEA countries, it was reminded that the CBRT’s last Inflation Report was announced in Ankara on November 2, and it was noted that the communication made in line with the last Monetary Policy Committee (PPK) decision texts showed that there was a strong focus on inflation.

The report stated that Erkan signaled that “tightening steps will continue until a significant improvement in inflation is achieved”, but did not provide any specific forward guidance regarding the level of policy interest.

The update made by the CBRT in the 2023 year-end inflation forecast mainly reflects the increases in inflation since July, more importantly, the report noted that the CBRT revised its end-2024 inflation forecast to 36% due to the influence of external factors such as upward revisions in oil prices and administered prices, and included the following evaluations:

“Output gap forecasts pointed to a significant slowdown in growth starting from the second half of 2024. The CBRT pointed out that the effects of cumulative tightening steps have begun to be seen and the first signs of a slowdown in domestic demand with a decrease in the monthly inflation trend. On the other hand, the CBRT emphasized that it has not yet seen a significant improvement in the inflation outlook and signaled further tightening in this context. On the question of ‘whether the CBRT aims to reach a positive real policy interest rate’, Mr. President Erkan stated that ‘the CBRT examines all the determinants of inflation on a monthly basis to decide on policy steps, instead of focusing only on real interest rates’.

We maintain our estimate that there will be a 250 basis point increase in the policy rate in November and the final policy rate level of 40% will be reached in April 2024. Depending on the inflation outlook, there is a possibility that the policy rate will reach 40% earlier.”

“It is important that the tightening will continue until a permanent and significant decrease in inflation is achieved.”

In the report of the US multinational investment bank and financial services company Citibank, it was emphasized that the CBRT increased its inflation forecasts for the end of 2023 and 2024 to 65% and 36%, respectively, and that the revised end-2023 inflation forecast is generally compatible with the market expectation, (68%) but the upper limit of the forecast path determined for 2024 represents the possible inflation trend more realistically.

The report noted the following:

“Among the issues emphasized by President Erkan, ‘disinflation, which will begin in the second half of 2024, will be supported by the increase in interest in TL-denominated assets, balancing domestic demand and anchoring inflation expectations,’ the tightening will continue until a permanent and significant decrease in inflation is achieved, the CBRT has withdrawn more than ₺1 trillion of liquidity from the market with the required reserve decisions taken between July 21 and November 2, although there is no specific timetable for exiting the Exchange-Protected Deposit (KKM) program, it is important that the attractiveness of TL-denominated assets will continue to be increased.”

Source: Trthaber / Prepared by Irem Yildiz

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