The Turkish economy has been preoccupied with debates over economic models and the policies of the new economic management in recent times. The "low interest, low inflation" policy led by President Recep Tayyip Erdoğan, which is being attempted to be ended by the duo Mehmet Şimşek and Hafize Gaye Erkan appointed after the elections, has raised questions about the anticipated measures and tightening policies, creating uncertainties in the markets. The promises of the new economic management for a "return to a rational ground" will significantly impact the future of the Turkish economy. #TCMB #CBRT

Changes in Interest Rate Policies:

The recent interest rate hike has brought criticisms that the new economic management is not yet acting entirely independently. However, among foreign investors, there are also those who view gradual and controlled interest rate increases positively. Nick Eisinger, the Manager of Vanguard's Emerging Markets Fixed Income Fund, emphasizes that Turkey should carefully monitor economic pressures and avoid balance of payments issues, stating that interest rate policies are of critical importance.

Economic Slowdown and Investor Sentiment:

Liam Peach, Senior Emerging Markets Economist at Capital Economics, states that the new economic management aims to avoid economic stagnation and that interest rate increases are supported by investors. Paul McNamara, Investment Director at GAM Investments, notes an increased positive outlook towards Turkey amid the slowdown in credit growth. Investors closely monitor the measures to prevent economic stagnation.

Foreign Investors' Reserves and Investment Expectations:

Foreign investors welcome the Turkish Central Bank's decision to stop intervening in the dollar/TL exchange rate. The $50 billion investment agreed during President Erdoğan's Gulf visit is on Turkey's agenda. However, investors still lack clear information about how and under what conditions this investment will enter Turkey. #centralbank

In Summary:

The changes in the Turkish economy and the policies of the new economic management are closely monitored in the markets and have captured the attention of investors. Changes in interest rate policies, efforts to avoid economic stagnation, and foreign investors' reserve and investment expectations hold significant importance for the country's economic trajectory. The measures taken and economic developments in the upcoming period will be decisive for Turkey's economic future. #turkey

Exchange rates in Turkey continue to be an important variable influenced by market movements. The rapid rise of the US dollar against the Turkish lira in recent times has become a focal point of interest in the markets. However, it has been observed that exchange rates have been relatively stable in recent days, raising questions about whether the Central Bank has intervened in the foreign exchange markets. #CBRT #TCMB #USDC #DOLLAR #turkey

Movement of the US Dollar Exchange Rate:

Yesterday, the US dollar closed at a level of 26.15 Turkish liras. Today, the dollar exchange rate is showing a moderate positive trend. Reaching its highest value of 26.1940 Turkish liras during the day, the exchange rate currently stands at 26.14 Turkish liras with a 0.19% increase as of 4:00 PM.

The Situation of the Euro:

The euro is also exhibiting movements similar to the dollar. Reaching its highest level of 28.89 Turkish liras during the day, the euro is currently at 28.94 Turkish liras with a 0.30% increase at the same time. The euro occasionally exhibiting more aggressive movements against the dollar gives the impression that interventions have been made in the USD/TRY parity.

Role of the Central Bank:

However, there is no definitive evidence that the Central Bank has directly intervened in the market. According to the CBRT Analytical Balance Sheet data, the Central Bank is generally in a buyer position in the foreign exchange market. This situation has also been emphasized by the Minister of Treasury and Finance, Mehmet Şimşek, to support the improvement in reserves. Şimşek has drawn attention to the contribution of foreign investors to the recovery process of reserves.

In Summary:

Exchange rate movements in Turkey are closely monitored. Despite the rapid increase in the USD/TRY parity after the recent elections, it has been following a stable trajectory in recent days. The Central Bank's position as a buyer in the foreign exchange market appears to be a move to support reserve improvements. However, there is no clear evidence of direct intervention by the Central Bank. It is important to closely monitor developments in the markets and follow the statements of relevant institutions.

Hafize Gaye Erkan, the Governor of the Central Bank of Turkey (CBRT), made significant statements regarding the measures taken to combat inflation and the future targets. Erkan revised the year-end inflation forecast from 22.3% to 58%, but emphasized that this increase is a temporary situation and they have initiated a monetary tightening process to ensure price stability. Here are the key points from Erkan's statements:

Monetary Tightening Process:

The Central Bank Governor stated that they have initiated a monetary tightening process to achieve a permanent reduction in inflation and they will strengthen it as needed. Along with interest rate hikes, selective credit and quantitative tightening measures will also be implemented. #interestrate

Future of Inflation:

Erkan stated that the current inflation surge will be temporary, and they aim to lay the groundwork for disinflation to begin in 2024. They further predict that a period of stability will commence in 2025, leading to a faster decline in inflation.

Main Trends and Expectations:

Erkan expressed confidence that inflation's main trend and expectations will consistently improve during the disinflation process, and the decisions taken will reflect this improvement by the second quarter of 2024. She highlighted that essential goods, food, and energy items have a significant impact on inflation, while the contribution of the services sector remains stable.

Domestic Demand and Current Account:

Erkan mentioned that strong domestic demand has been effective in the economy, while total supply has been more moderate. They predict that selective credit tightening measures will keep domestic demand in balance, and they expect a significant improvement in the current account balance in the second half of the year due to the impact of monetary tightening measures.

Exchange Rate and Other Factors:

The Governor acknowledged that exchange rate pass-through has increased, but she stated that the monetary tightening process will support exchange rate stability. Erkan also pointed out that wage increases have led to cost increases, which will be reflected in prices within a few months. Additionally, she mentioned that price increases in the service sector are still at high levels, and rent increases also have an impact on inflation.

Determination and Independence:

Erkan emphasized the importance of managing expectations to break the inertia in inflation and stated that they will use all tools with determination until inflation reaches single digits, avoiding any political statements. She underlined that the Central Bank will make independent decisions.

Future Plans:

Regarding the weak performance of commercial loans, Erkan mentioned they expect a recovery in July. They also plan to diversify Turkish lira savings instruments and support the deepening of capital markets. Furthermore, she disclosed that reserves have strengthened, financing conditions have improved, and exchange rate volatility has decreased.

Inflation Forecasts:

Erkan shared the updates on inflation forecasts, indicating that they have raised the year-end inflation forecast to 58%, set the 2024 forecast at 33%, and established the 2025 year-end inflation forecast at 15%. #inflations #TCMB

In Summary:

According to the statements of CBRT Governor Hafize Gaye Erkan, the monetary tightening measures in the fight against inflation will continue with determination, and a decrease in inflation is expected in the coming years. The goal is to implement cautious policies and achieve economic stability through independent decisions. The temporary inflation surge is expected to be balanced in the near future, and a disinflation process is foreseen to begin. #CBRT #Turkey

The Central Bank of the Republic of Turkey (CBRT) raised its policy interest rate by 750 basis points to 25% in the Monetary Policy Committee (MPC) meeting held on August 24, 2023. This decision was regarded as an unexpected development in the markets.

Impact of the Interest Rate Decision on the Markets

Following the announcement of the interest rate decision, the USD/TRY exchange rate experienced a sharp decline. The USD/TRY exchange rate, which had been hovering around 27.20 for a while, dropped to 26.50 after the decision. Currently, the USD is trading at 26.65 TRY. Similarly, the EUR/TRY exchange rate also decreased from 29.75 to 28.85 due to the impact of the interest rate decision, but later it climbed back above 29.00.

Rationale Behind the Central Bank's Decision

In the decision statement of the Central Bank, it was emphasized that monetary tightening would continue in order to control inflation and prevent disruptions in pricing. It was stated that these measures would make a significant contribution to reaching the inflation target of 5% in the medium term. The decision statement also noted that the main trend of inflation continued to rise, driven by factors such as strong domestic demand, cost increases, and tax adjustments. It was mentioned that the rise in fuel prices also caused an inflation deterioration beyond expectations.

Goals of the Central Bank

The Central Bank expressed its belief that with the monetary tightening steps taken, inflation would be brought under control by 2024. Additionally, attention was drawn to the increase in direct foreign investments, improvement in external financing conditions, increase in reserves, and tourism revenues providing support to the current account balance.

In Summary

The Central Bank's interest rate decision aims to contribute to economic stability and to control inflation. While raising interest rates might lead to tightening in the economy, the goal is to rein in inflation and ensure financial stability. The impact of interest rate decisions on financial markets should be monitored in the long term as well, as economic fluctuations and global developments can shape these effects.

Detailed Analysis

The Central Bank's interest rate decision can be considered a significant turning point for the Turkish economy. This decision is seen as an indicator of the Central Bank's determination to combat the recent surge in inflation.

The impact of the interest rate decision on financial markets was initially positive. The USD/TRY exchange rate experienced a sharp decline, leading to an appreciation of the Turkish lira. This development will provide relief to exporters and companies that rely on imported inputs.

However, the long-term effects of the interest rate decision on the economy are not yet clear. Raising interest rates can lead to economic tightening, which might result in a slowdown in investment and consumption. Moreover, higher interest rates can increase borrowing costs, affecting the financing expenses of businesses and consumers.

The Central Bank's interest rate decision can be viewed as a significant step in the fight against inflation. Nevertheless, it is crucial to closely monitor the long-term impacts of this decision on the economy.

#CBRT #TCMB #USD/TRY #Turkey #Inflation