The Central Bank (CB) hiked the policy rate by 5 points to 30%, in line with forecasts. The rate hike totaled 21.5 points in the last four meetings.
What do we aim for with that rate hike? What is our priority? Is it to fight inflation or ensure foreign inflow?
The CB stated in the PPK statement that the year-end inflation is close to the upper bound of the forecast range, which is 62%, in the Inflation Report. The year-end inflation forecast is 65% in the OVP. Moreover, it will exceed 65% and hover around 70-75% based on the estimations.
So, the current policy rate will slightly work to fight against inflation! However, the rate hike may avail to attract FX abroad. Foreigners want to earn while coming and buying. Relatively high FX rates, the principal condition to gain while coming, have almost been realized. They surged by over 40% compared to the pre-election period.
The needed one is a rate hike to enable foreigners to earn while buying, and we are doing it now. Assuming that the Treasury’s borrowing interest rate and the policy are parallel, the TRY 85 worth of government debt securities with a nominal value of TRY 100 and interest rate of 17.5% in July has fallen to TRY 77 with a 30% interest rate now. USD/TRY also rose nearly 0.5% after the policy rate decision. So, we may see a slight movement in foreigners’ portfolio investments in the upcoming period.
Regarding FDI inflows, it won’t happen instantly from today to tomorrow or from this year to next year. We will consider asset sales as FDI and console ourselves with it.
The new economy administration, which held four PPK meetings, hiked the policy rate by 6.5 points, 2.5 points, 7.5 points, and 5 points, respectively.
“The policy rate will be determined in a way that will create monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and reach the 5% inflation target in the medium term. Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”
That is the exact expression included in the PPK statement in September, August and July, while the statement was similar to it in June.
We don’t have the data estimating the year to achieve the 5% annual inflation. But we know we should expect it in the post-2026 period at least, considering the inflation forecast of 8.5% for 2026. So, the earliest year will be 2027.
Our goal is to reduce the monthly inflation to 5% nowadays. We are so far from the annual inflation target of 5%.
At least, the purpose is to stop the surge, which seems to have been out of control.