As Türkiye's interest rate falls to single digits... - LEVENT YILMAZ

As Türkiye's interest rate falls to single digits...

Last Thursday, we followed the interest rate decision of the Central Bank Monetary Policy Committee (PPK). Although the MPC determined a rate above general expectations, the reduction decision was not a surprise for the markets. Let's take a quick look at the text of the decision.


WHAT DOES THE PPK DECISION CONTAIN?

With a 150 basis point interest rate cut, the Central Bank cut the one-week repo auction rate, which is the policy rate, from 12% to 10.5%.

There are mainly four discrepancies between the text of the last decision and the text of the previous decision. The first of these; The concern in the previous text as "a sign of a slowdown in growth" has been replaced by the assumption that "the slowdown in growth continues". Meanwhile, “…the limited effects of external demand-based pressures on the manufacturing industry on domestic demand and supply capacity, for now, are being closely monitored,” which was not included in the previous text. sentence entered the text of the final decision.

The third difference is that the effect of decreasing foreign demand on aggregate demand conditions and production is closely monitored. Finally, for the first time in a long time, we see such a clear direction for the next meeting in the text. “The Board has decided to reduce the policy rate by 150 basis points. After a similar step was taken in the following meeting, the Board put on the agenda the end of the interest rate cut cycle.” An unequivocal verbal guidance was made with these sentences.


WHAT ARE THE EFFECTS OF THE INTEREST DECISION?

Since the rate cut decision came in line with the general expectation, we do not expect any impact other than the previous pricing on the decision. But there are some areas that the decision will affect. For example, with the discount decision, commercial loan rates will come down a little bit. On the other hand, the increase in the number of treasury bonds held by banks will continue to lower the bond yields. This will reduce the Treasury's borrowing costs.


WHAT COMES NEXT?

According to the MPC's guidance, a 150 basis point rate cut has already been announced at the next meeting. In other words, with the MPC on November 24, we will see a single-digit policy rate. After that, we will focus on the first quarter of 2023, where the strong base effect significantly impacts the big decrease in inflation. On the other hand, we can foresee that the USD/TL level will be balanced mainly with macroprudential measures, a liraization strategy tools, and reserve management.

In order to bypass the decrease in banks' appetite for lending, we will see that public banks are more effective and a new Treasury Supported KGF package is included in the application to facilitate access to credit.

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