Loan interest rates are at a level that can be considered adequate for the fight against inflation, given the expected inflation twelve months from now. The same cannot be said for deposit rates. Most deposits have maturities of up to three months. Therefore, deposit rates should be compared with the monthly inflation rates that will be realized in the January-March period. Depending on the bank, the average deposit rate (up to three months) for the week of December 8 was 51 percent. When withholding tax deductions are taken into account, the net deposit interest rate is a few percentage points lower. It would be useful to raise it a little more to reduce residents’ demand for dollar-denominated financial assets. In the decision text of the last MPC meeting, the Central Bank hinted that – barring something unexpected, of course – it would raise the policy rate one or two more times and then stop. If deposit rates follow a parallel course, this will go a long way in reducing inflation.
In recent months, many of the external factors that determine inflation have been developing in a way to help bring inflation down. The interest rate decisions of major central banks are important for the amount and cost of capital flowing into countries like ours. The Fed’s and the ECB’s rate hikes appear to have come to an end. The new topic of discussion is when they will start lowering policy rates. Energy prices have been falling in recent months. It was feared that the Israel-Hamas war would push energy prices higher; this did not happen. In late September, Brent crude oil was close to USD 95 a barrel. These days it is hovering around USD 76. European natural gas prices have also fallen, although not to the same extent. Likewise, the Central Bank’s ‘exchange rate at a fixed increase rate’ policy keeps monthly exchange rate increases below the inflation rate of that month, and one gets the impression that an increase in line with the end-2024 inflation forecast of 36 percent is allowed.
All this suggests that even if inflation reaches 70 percent on an annualized basis in mid-2024, it could fall to the projected level of 36 percent for the rest of the year. As for monthly inflation developments, the downward trend is expected to be observed earlier. The Central Bank has been emphasizing that this trend has already started for some time. It should be noted that we are talking about an inflation rate of 36 percent. If it falls to that level after twelve months, we will all rejoice together. But 36 percent is a very high inflation rate by international standards. For example, when the inflation rates projected for the end of 2023 are analyzed, only 10 out of 190 countries have inflation rates of 36 percent and above.
In short, even if we reach 36 percent by the end of 2024, we still have a long way to go. In order to achieve that distance, it is clear that the road must continue in the same direction. If there is a U-turn or a detour, we will be longing for 36 percent, let alone significantly dropping the 36 percent level. This would be a detour from the fiscal and monetary policy that has led to increased confidence that 36 percent is achievable, leaving aside energy prices that are beyond our control and the interest rate policies of the major central banks. Under those conditions, it would be impossible to hold the exchange rate, which is the main determinant of inflation.