Market expectations vs realities about the Central Bank’s rate move

In light of Turkey’s current inflation rate, many market players say the Central Bank should hike interest rates again in its committee meeting this week. Despite this, very few market players expect any rate hike decision in the Monetary Policy Committee meeting, which will be held on Oct. 25.

The inflation rate is expected to rise in October on an annual basis despite a government campaign which has urged the private sector to realize a minimum of 10 percent price cuts until the yearend. The inflation rate rose nearly 2 percent in October 2017 on a monthly basis. As the recent price cuts will make a partial impact on the inflation rate this October, we can expect a higher than 2 percent increase on monthly basis. In this regard, it is expected that the annual inflation rate again will show an increase, even if slightly.

Regarding the current inflation rates and an expected increase in prices in the future, many market players think that the Central Bank should keep hiking interest rates. However, it is very unlikely for the Bank to do this, according to them.

The Central Bank raised the interest rates by 11 percent since the beginning of the year, with the Bank holding the highest hike by 6.25 percent during its meeting on Sept. 13. This is one of the biggest reasons why many market players do not expect any further rate hike. Under some political concerns, the Bank is also believed to not act. A recent decrease in the use of bank loans constitutes another factor ahead of local elections.

A recent increase in the Turkish Lira’s value will be another factor that will make a new rate hike unlikely. Market analysts have said the Central Bank would not need a further hike in light of the current parities. According to them, a series of recent developments have enabled the lira to gain value against the greenback and others, including the release of U.S. pastor Andrew Brunson, an ease in the Turkish-U.S. tensions and various global economic developments, in addition to the 6.25 interest rate hike by the Turkish Central Bank. A banker said the foreign exchange rates are still high and a rate hike may help the lira see 5 against the U.S. dollar, while adding that any rate hike should not be expected.

Fight against inflation

Almost all market players said the newly-announced government campaign would not help the inflation rate decrease. Although this campaign has contained the extreme price increases in a way, they do not find this trend permanent. They think a big gap in the wholesale (producer) prices and the consumption prices will approximate one way or another. In this regard, a serious and thorough combat against high inflation can be achieved through monetary tightening and interest rate hikes, according to them.

A banker said that stability can be maintained again if the foreign exchange rates can be slashed a bit more. This will also decrease the possibility of the expected bankruptcies in 2019 and the need for banks to find additional capital, according to the banker.

In this vein, market players said that it might be more appropriate technically to make new interest rate hikes for the sake of a future economic recovery by accepting the possibility of a further economic slowdown in the short term. Otherwise, the parities may not be maintained even in today’s levels.

In sum, the rate decision of this week will be a litmus test that will show whether the government will do what is required to maintain economic stability.