CBRT and interest rates
Well, the MPC meeting didn’t enlighten much. The removal of “… further monetary policy tightening will be delivered, if needed” didn’t help.
As such, the statement looks like more of a two-edged razor, supposedly rendering flexibility in both directions. What I read is this: ‘we can’t cut the policy rate now, and possibly we will postpone initiating the (expected) rate cut sequence until September or so, but we are intent to cut in the end’.
However, rate cut expectations have been halved down, and people no longer expect 500 basis points, which looks unfeasible as time passes by. Surely, inflation will end up at a point higher than expected a couple of months ago, and currency stability is at stake these days.
Because oil prices are now higher, and because any spark that could ignite a currency spike is today within the stretch of imagination, the risk premium is higher. That means room for manoeuvre is virtually non-existent.
The ex ante 12-months ahead real rate stands at 3.33%, higher than January/February, but less than what the risk premium would warrant. It is perhaps just a little higher than the ideal average real rate given the potential growth rate, but it is less than any real rate extraordinary circumstances would entail. The real rate is too low to convince either overseas investors or local residents to buy TL-denominated assets.
Attempts at showing ‘financial prowess’ where there is neither need nor room for a display can only cause TL rates to head north, a stylized fact borne out by events that took place in the last four weeks.
The graphic shows how the TL rates go up all too often, amongst episodes of standing still, but once it goes it stays there on a new plateau, very similar to the behaviour of the exchange rate after 2013.
We await the inflation report, which might signal more on the inflation outlook.