This week, we followed two critical central bank decisions that directly impact the Turkish economy. The first was the U.S. Federal Reserve's interest rate decision and Fed Chairman Powell's statements. The second was The Central Bank of the Republic of Türkiye (CBRT)'s interest rate decision and policy text.
WHAT WAS THE FED'S DECISION?
The Fed has been raising interest rates and shrinking the balance sheet for a while. In this context, the rate hike by the Fed at the last meeting did not come as a surprise. However, the fact that the latest inflation data, both on the headline and the core side, surpassed expectations, resulted in an uptick regarding the expected rate of interest increase. The expectation, which stood between 50 and 75 basis points before the inflation data, surged to 75 or 100 basis points after the inflation data. However, the Fed did not surprise and increased interest rates by 75 basis points in line with the general expectation.
Although the interest rate decision came in line with the market expectations, we saw very serious revisions in growth, unemployment and interest rate expectations relative to June forecasts. For example, for the year 2022; The unemployment expectation, which was 1.7% in June, was revised this time to 0.2%, and the unemployment expectation, which was 3.7% in June, to 3.8%. Unemployment expectation for 2023 has been increased from 3.9% to 4.4%. The reason why this data is important is the sentence Powell used at the post-decision press conference: “There will be an increase in unemployment this year and next year due to slow growth, but we need it.”
Another important revision of the Fed's forecast was the interest rate. We see that Fed members revised their interest rate expectations for both 2022, 2023, and 2024 upwards. For example, the expectation for this year, which was 3.4%, was increased to 4.4%. Similar increases are also valid for 2023 and 2024. So the Fed will raise interest rates for a while. Moreover, the possible interest rate cuts expected by some economists in 2023 seem to be shelved.
WHAT WAS THE CBRT'S INTEREST DECISION?
The Central Bank's Monetary Policy Committee (MPC) reduced the one-week repo auction rate, which is the policy rate, from 13% to 12% at its meeting this month. With this decision, it is necessary to examine the expressions in the PPK text in detail. In my opinion, the most important sentence in the text is: “The Board will continue to strengthen its tools to support the effectiveness of the monetary transmission mechanism.”
I think the main deduction we can make from this sentence is that the CBRT may update the macroprudential measures taken after the previous meeting and bring additional measures. The first step was taken the day after the decision, with the restriction of commercial loan commissions. There may be a sequel.
WHAT AWAITS US AFTER CBRT AND FED DECISIONS?
We saw a rapid rise in the Dollar Index after the Fed's rate decision was announced and revised its short-term projections negatively. These negative revisions, combined with Powell's rather "hawkish" rhetoric, pointed to a monetary tightening that would further strengthen the dollar, causing other currencies to depreciate against the dollar.
According to the current global conjuncture and the results of the CBRT and Fed's interest rate decisions, we are in a period where upside risks on the dollar/TL side continue. However, considering the situation within the inflation outlook, let us recall that it is likely that the CBRT will implement some additional "macroprudential measures" in the coming days.