Foreign Investment Institutions Applaud CBRT’s Interest Rate Increase

Foreign investment institutions welcomed the decision of the Central Bank of the Republic of Turkiye (CBRT) to increase interest rates by 500 basis points, above expectations.

The CBRT Monetary Policy Committee (MPC) increased the one-week repo auction interest rate, which is the policy rate, by 500 basis points from 45% to 50% yesterday.

In the MPC decision text the following was stated, “The Board also decided to change the operational framework and determine the Central Bank’s overnight borrowing and lending rates with a margin of -/+ 300 basis points compared to the one-week repo auction interest rate.” Before yesterday’s interest rate decision, overnight borrowing and lending rates were determined with a margin of -/+ 150 basis points compared to the one-week repo auction interest rate.

Like experts, foreign investment institutions also emphasized that the “surprise” interest rate decision taken by the CBRT and the MPC text showed how serious and determined the bank was in the fight against inflation.

“We expect inflation to start falling sharply in the second half of the year.”

US investment bank Goldman Sachs’s Turkiye report said, “We think that the CBRT’s interest rate decision may increase the reliability of the bank’s determination to ensure price stability and a complete transition to traditional policies. The fact that the interest rate increase was made less than two weeks before the local elections further strengthened the signaling effect.”

In the report, it was noted that the CBRT maintained its tightening tendency and reiterated that the current monetary policy situation would be maintained until a significant and permanent decline in the underlying trend of monthly inflation was achieved and inflation expectations converged to the predicted forecast range.

In the report stating that the increase in year-end inflation expectations in the CBRT’s survey largely reflects the retrospective view, “We think that inflation expectations have not increased. We do not think that the decision in question is the beginning of a new tightening cycle. This step was taken to prevent expectations of depreciation in TL and to reduce inflation expectations.”

The report noted that inflation is expected to decline to 33% by the end of the year, as it begins to fall sharply in the second half of the year, and the CBRT is expected to start reducing interest rates starting from the third quarter.

“It shows that the CBRT may continue to use different measures and/or liquidity management tools.”

HSBC, the multinational investment bank headquartered in England, said in the report it sent to its customers regarding the CBRT’s unexpected decision to increase interest rates: “Despite the upcoming elections, the determined tightening of monetary policy is encouraging and positive.”

The report noted that the decision to expand the interest rate corridor indicates that the CBRT may continue to use different measures and/or liquidity management tools in the future, and that the CBRT will monitor market liquidity conditions and use sterilization tools when necessary.

“Turkiye’s disinflation targets look more and more realistic”

German bank Deutsche Bank, in its report on Turkiye, reminded that they closed their long TL carry trade positions with a profit about 10 days ago and stated that they felt safe to take a long position in TL again after the CBRT’s interest rate decision yesterday.

The report, which predicts that the latest interest rate increase will ease the pressure on reserves, underlines that Turkiye’s disinflation targets look increasingly realistic.

Source: / Prepared by Irem Yildiz

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