CBRT did not change the policy rate yesterday, and it was mostly not expected to change it. So, why was there such a majority expectation? On March 21, the interest rate was increased by 500 basis points. What had changed between the two meetings?
Did the CBRT say “let’s wait and see” the effect of the 500 basis point increase? Which variable would he wait and see for its effect? Aren’t there already indicators he can look at?
We cannot immediately see the effect of the interest rate increase on inflation anyway. Moreover, no matter which index we look at, inflation remains high. Inflation expectations also remain high.
As the Minister of Treasury and Finance said, the inflation expectations of the “locals” or “natives” are still high and they are not convinced that inflation will decrease rapidly. By the way, it is not easy to understand why the words “locals” or “locals” attract reactions.
Just as there is “foreigners” in some variables and expectations about Turkey, there are also “natives” or “locals” and these are words with antonyms. I wonder if the way he said it was antipathetic? Maybe it is.
The statement made by the Ministry of Treasury and Finance in response to this reaction was not convincing at all, even absurd. They say that the Minister said that “local investors should be convinced that inflation will decrease”, but what was said was “local decision makers”.
Does inflation expectation only cover local investors? Since we are talking about high inflation expectations and high domestic demand, isn’t there a particular consumer here? The statement made by MHP that “our chairman meant others, not the minister” was equally absurd.
Anyway, let’s get to the question. Why was the CBRT interest rate increased last month, why was it left the same this month? Last month, I explained why the interest rate was unexpectedly increased by 500 basis points. Uyghur (March 22, 2024).
The reason was that the exchange rate started to increase relatively rapidly both in dollar terms and in the dollar-Euro basket. The foreign exchange basket, which was 32.57 on March 4, became 33.75 on March 19. Because there was an expectation that the pressure on the exchange rate would ease a little after the March 31 election.
This month, the basket rate, which was 33.60 on April 1, was 33.62 on April 24, meaning it remained unchanged. The expectation that the pressure on the exchange rate would decrease and the exchange rate would rise did not come true. The exchange rate increase in March and the exchange rate stability in April can be seen in Figure 1.
So, if we look at the April decision from an exchange rate perspective, the interest rate did not have to change. So, is there only one exchange rate that the CBRT follows for its interest rate decision? There are definitely other variables, but we understand from the explanations that the exchange rate is the most important variable.
Source: TCM
FFAIZ: CBRT weekly funding rate
$FX: Dollar exchange rate, $1 = x TL
EFX: Effective exchange rate, ($0.5+0.5€) = x TL
The interest in Figure 1 is the daily funding interest of the CBRT. Exchange rate variables are also daily. When we look at the changes in the last year, we see this. Starting from the end of June 2023, the interest policy is changing and the interest rate is determined so as not to increase the exchange rate.
Why so? Because, as stated in the CBRT’s statements, the exchange rate is seen as the inflation anchor.
So how sustainable is this policy? It can continue as long as there are inflows from different foreign exchange sources, including exports, and as long as current account deficits allow. But it cannot continue for too long, especially if inflation and its expectations remain high. For this reason, there are statements that inflation will drop very sharply in the summer.
Going back to the CBRT’s interest rate decisions; In my opinion, the most important variable affecting the short-term policy rate decision is the development in the exchange rate. When I look at interest rate decisions this way, my interest rate expectations are confirmed more often.
resources
Uygur, Ercan (22 March 2024) “Unexpected interest rates: Türkiye and Argentina” T24
https://t24.com.tr/yazarlar/ercan-uygur/beklenendik-faizler-turkiye-ve-arjantin,44069
Who is Ercan Uygur?Prof., one of Turkey’s leading economists. Dr. Ercan Uygur graduated from METU in 1969. After his graduation, he took the ‘assistant expert’ exam at the State Planning Organization (DPT). However, three people who were successful in the exam, including Uygur, were not appointed to office. Uygur then started working at the Ministry of Finance, where he took the exam. A year later, his application to the OECD for a two-year postgraduate scholarship was accepted after the interview to which he was invited. He received his master’s degree at the University of Warwick, England. He completed his doctorate at the University of East Anglia; Meanwhile, he taught ‘econometrics’ for a year. In 1977, he took the assistant exam for the ‘econometrics’ chair at Ankara University, Faculty of Political Sciences (Mülkiye), Department of Economics and Finance; He started working at this chair in the same year. He went to this country with a nine-month Norwegian Government scholarship in 1981 for his associate professorship studies. Prof. Dr. He studied with Leif Johansen. On the day of the associate professorship oral exam in Turkey, two jury members, Prof., with the Martial Law Law No. 1402. Dr. Tuncer Bulutay and Prof. Dr. The jury meeting, which could not be held when Nuri Karacan was suspended from the university, was held seven months later. Prof., one of Turkey’s leading economists, was suspended from the university in the period following the September 12, 1980 coup. Uygur, to whom Bulutay said, “You will stay at Mülkiye to represent us,” received the title of ‘associate professor’ in 1983. In 1988, he went to the USA with a Fulbright scholarship and studied with Prof. Dr. He worked with Lawrence Klein on the LINK project. He received the title of ‘professor’ in 1989. He gave summer courses at Koç University between 1994-2012. He retired early from Mulkiye at the end of 2010. While he was a faculty member at Mulkiye, he worked as a consultant to the following institutions: – Islamic Countries Statistics, Economic and Social Research and Training Center (1986-1994) – Wharton Econometric Forecasting Associates (1988-1991) – Central Bank of the Republic of Turkey (1988-1993 and 1997-1998) – State Institute of Statistics, TURKSTAT (1990-1996) – ILO / International Labor Organization (project consultant, 1990) – TR Undersecretariat of Treasury (project consultant, 1992-1993 and 1997-1999) – World Bank (project consultant, 1999, 2002, 2009, 2010-2011) – United Nations ECE (project consultant, 1999-2000) – Third World Network (2009) Columnist in Yeni Yüzyıl newspaper (1995-1998), Head of the Department of Economics at Mülkiye (1996-2008), Member of the Science Board of Ankara University (2002-2010), Head of the Turkish Economic Association (2003 -2019), editor of Ekonomi-Tek magazine ( He served as Vice Rector of Final International University (2012-2020) and Dean of Faculty of Economics and Administrative Sciences (FEA) (2016-2021). In 2011, he was elected as a member of the Advisory Board of the International Economic Association (IEA), a position he still continues. In 2012, he was invited to become a member of the Kyoto Prize Advisory Board; He published 12 books in Turkish and English, including those he edited, and wrote more than 50 scientific articles. Since September 2021, he has been writing a column in T24, which was founded and managed by his students from Mülkiye. Prof. Dr. Ercan Uygur, 38 years of university life; Prof. at the Mulkiyeliler Association Wednesday Talks to which he was invited on 18 May 2017. Dr. Tuncer Bulutay summarizes it with the title he gave for his speech: “Student at METU, Professor at Mülkiye…” |
