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CBRT: Real interest rate at the lowest among peers

CBRT: Real interest rate at the lowest among peers
25.05.2022 15:40

Despite the macroeconomic parameter threats stemming from increasing inflationary pressures, the Central Bank has not made any changes in the looser monetary policy it has been implementing since September. It has kept the interest rates constant at 14% for a few months, despite the continued increase in inflation at full speed. In this direction of the central bank, although we did not receive a reversal signal in terms of the latest policy decisions and statements, we expect it not to change the interest rates at the May 26 meeting.


Inflation jumped to 70% in April, reaching its highest rate since 2002. The real interest rate (one-week repo rate minus inflation) is by far the lowest among emerging markets, at minus 56%. It is known that the political will and, accordingly, the economy management want interest rates not to be high for high economic growth. Since we have not received any signal of a change in this perspective, it seems that the Central Bank is not planning to tighten policy at this stage, despite all compelling indicators, especially inflation.


Due to the loose interest rate buffer, the lira is also highly sensitive to external risk factors. Along with the accelerated depreciation in May, there is a depreciation of 18% throughout the year, and 9% of this depreciation occurred in May. In fact, the exchange rate movement of May does not concern a single period. Delayed effects and spillover effects should also be considered. While direct import costs increase, it increases the price of all kinds of goods and services through imported inputs. The transition to CPI from May will also affect the inflation rates of the coming months. Currency pass-through can occur at different rates and times, for example, the demand situation in the market can accelerate this effect. Cost pass-through has its first effect on PPI and its next effect on CPI.


Within the scope of the “liraization” strategy of the central bank, the issue of price stability was based on foreign currency indexed deposits or other TRY-based financial products that could be issued rather than interest instruments. Regarding the current account surplus, which is expected to operate in this strategy, it is seen that no aid will come due to the new import-export balances. Since the exchange rate is around 16.30 and the periodic interest rates for FX-linked deposits are also exceeded. Despite the challenging conditions, the Central Bank does not signal a return to orthodox monetary policy and interest rate hikes.

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