CBRT: Turkey’s real interest rates well below their peers

It was understood that it would not be a surprise if the Central Bank of the Republic of Turkey, which has also accustomed the market to the implementation of new economic policies, continues to cut interest rates. The fact that domestic economic policies emphasize growth rather than inflation and in this context, the guidance on reducing the policy rate to single digits, as well as the financial system rule changes aimed at lowering market rates to policy rate levels, the CBRT’s continuation of the rate cut series at its October meeting and we expect it to reduce its weekly repo rate from 12% to 11%.

Comparison of real interest levels in Turkey and other developing countries Source: Bloomberg, Tera Yatirim

If we refer to the growth risks that form the basis of the CBRT’s rate cuts, it seems that the economic slowdown revealed by the last 3Q22 leading indicators and the deep recession risks in the context of the energy crisis in Europe will continue to negatively affect the growth factor. In this perspective, the current weakness of the lira will not be expected to change much in terms of keeping its export potential open. The function of interest rates is to support growth from the export and production base, to increase commercial loans with a selective approach, and accordingly to reduce financing costs.

The CBRT cut the policy rate by 100 basis points in each of its last two meetings, bringing the inflation-adjusted policy rate to -71.5%, which is by far the lowest among peers. Since the bank’s September meeting, the annual inflation rate has increased further to 83.5%, and the lira has hit new lows. We do not think that this is a factor currently being watched by economic decision makers. Despite the ongoing weakness in the lira and the ongoing rise in inflation, we see that these compelling factors are considered secondary and they are tried to be balanced with “liraization”. In this conjuncture, we think that there are risks that additional interest rate cuts may weaken the currency further and have a nurturing effect on inflation.

The central bank announced new changes to encourage the conversion of foreign currency deposits into lira. In its latest move, the central bank has increased the rate of issuing lira-denominated securities from 3% to 5%, forcing lenders to hold more of their securities in lira. The central bank said it will take additional “liraization strategy” steps this year and in 2023. Such measures brought 10-year lira bond yields down 1,277 basis points for 2022, the biggest drop since 2011. The main impact of this will be on bonds with a maturity of 5 years and longer. But the returns reflect artificial demand driven by “banks and pension funds that should buy, not the real investor.” The aim is to advance liraization through the transformation of deposits and to converge market interest rates to the policy rate reference.

As we move towards the elections, it is understood that Turkey will insist on the new non-classical economy model. Therefore, we do not expect a reverse reflex in monetary policy despite all the compelling factors over inflation and exchange rate. It is expected that the Central Bank will continue to reduce interest rates after the October meeting and will want to find an application area for this trend in the first months of 2023. In light of these factors, we assess that the central bank thinks it has room by lowering interest rates.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı

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