Despite the market's 25 basis points interest rate cut expectations, the Central Bank has suspended the interest rate cut that it has maintained since July 2019, keeping the policy rate constant at 8%. As the interest rates are kept constant, it is observed that the Central Bank takes into consideration the inflationary concerns that increase with the periodic effects and pandemic effects and shows a more cautious approach.
In the policy statement, it is emphasized that the increase in unit costs and periodic / epidemic food inflation shifted both headline inflation and core inflation trend with Covid-19 effects. Although the low demand effect limited the inflationary outlook in the pandemic period, the same situation cannot be mentioned for cost-induced inflation. In this context, it is observed that the inflation increased by 1.36% monthly in May and increased to 11.4% on an annual basis. In June inflation, which will be announced next week, we expect an upward trend on an annual basis and annual inflation to rise to 12%.
It is obvious that another factor that stands out as much as the need to keep inflation under control is global capital movements. Although it has been at a negative real interest level for a long time according to the actual inflation level, the field of action of the Central Bank has been narrowed according to the official expected inflation levels. With the special conditions occurring during the pandemic period, the demand effect in the time of normalization, and the production and service supply that will remain below the pandemic, the risks regarding the future outlook have also evolved upwards. In this process, we can interpret that at least a cautious approach has been taken for the current period, since a FX inflow that could reduce exchange rate could not be provided with a globally abundant liquidity advantage or swap line, and therefore limited the possibility of providing a significant decrease in unit costs. Negative real interest rate and market constraints limiting foreign exchange inflow should be taken into account. Of course, considering the easing in the monetary policy and the current trend of inflation, the step taken is not a major step.
On the growth side, pandemic effects are tried to be balanced with credit growth. In addition to the decrease in interest rates in recent period, the loan demand has increased in the framework of the regulation of the bank loan interest rates and the support packages of the state banks.
Our expectation was that although there was no change in the main policy trend of the Central Bank, the range of interest cuts was now narrowed and some meetings could be passed without a cut. After that, even if there is an interest rate cut, it will be done at very limited rates. We also think that the risks regarding the official inflation expectations of the Central Bank are upwards and we maintain our 10% inflation expectation at the end of the year. The trend that inflation will be in after July and the revisions in the Inflation Report to be announced by the Central Bank at the end of July will also reveal the idea about the policy trend for the rest of the year.
Source: Tera Menkul
Hibya News Agency