Word arrives on interest rate increase, next is practice

The pressure of the markets has produced results and the Central Bank announced at the beginning of the week that it would increase interest rates. The markets were observed to have eased with this announcement; share prices went up; foreign exchange rates and interest rates started falling.

Central Bank Gov. Erdem Başçı, in his statement, said a “moderate” increase in interest rates was on the agenda of the Monetary Policy Board, set to meet on July 23. It is not yet known what the equivalent of the “moderate” rise in interest rates is; it is being debated whether the rise will be one that will satisfy the market. However, the reason for the positive reaction the markets have given stems from the fact that such an announcement has been made rather than the extent of the increase. In other words, the real reason of the positive reaction of the markets in the first two days is that the Central Bank has reached the point the market was expecting it to reach.

Whether or not the positive course will continue after this first reaction will be determined by the increase in interest rates to be introduced next week. It is being reported that investors who have invested funds in Turkey expect a 2-point increase, however because of the “moderate” clause the expected increase rate is around 0.5 or 1 points.

Bank executives said the foreign investor was not interested in the Treasury’s borrowing tender held on the first day of the week; that the demand was mainly local. This outlook, despite the fact that expectations have improved, was interpreted as “the foreigners may want to see the increase next week.” One bank executive said at least the exit has stopped, adding, “If next week a 1-point or more increase in interest rate is decided, the foreigner may start returning.”

Hence, with the Central Bank announcement regarding an increase in interest rates, the panic mood in the markets has stopped; however it is not definite yet whether it will recover from now on. In other words, the verbal intervention in the market was successful, now it is time for practice, that is, the decision to be made for an increase in interest rates.

Indeed, meanwhile, the course of the investigations launched by authorities such as the Capital Markets Board (SPK) and Banking Regulation and Supervision Agency (BDDK) regarding market transactions in certain periods, and the stances to be adopted here will be influential in the decisions of the markets and of foreign investors.

High inflation expected

Actually, we know that it is the markets that make this increase in interest rates; in other words, the change in the official interest rate is not very effective in practice. However, because what is important for the market is how the Central Bank reads the state of affairs and whether it is making the correct decision, they expect the official interest rate to go up.

When viewed from a different point of view, it is observed that the increase in the inflation rate actually also supports the increase in interest rates because it has already become a dream that the 5.3 percent inflation rate determined for the end of year will be met.

For this reason, the analyses to be included in the “Inflation Report” to be issued by the Central Bank at the end of the month and changes in estimates are very important.

Meanwhile, in the last expectation survey of the Central Bank, it is seen that the expectation about the inflation target has demonstrably gone up; that the end-of-year inflation expectation has risen from 6.5 percent to 7.2 percent.