CBRT Monetary Policy Committee will announce the last interest rate decision of the year at its meeting today. At the meeting, the one-week repo auction interest rate, known as the policy rate, is expected to be increased by 250 basis points to 42.5 percent.
Experts pointing out that the CBRT’s funding of banks through the swap channel, rather than repo, reduces the effectiveness of monetary policy, and also express the need for additional tightening measures.
Rate cuts may start before the end of 2024
All 12 economists participating in the Reuters survey expect a 250 basis points increase in the policy rate, which is at 40 percent. The median of the forecasts of 11 economists who answered the question about the level of the policy rate in June 2024 was 45 percent. The survey also predicts that interest rate cuts may start before the end of 2024. The median of 10 economists’ policy rate forecasts for the end of 2024 is 37.5 percent. Forecasts are between 35 percent and 45 percent.
Banking sector sources pointed out that the main funding tool of the banking system from the Central Bank is the swap channel and stated that the funding cost of banks through this channel is approximately 36 percent, below the policy rate of 40 percent. Thus, the sources pointed out that the banking system can still access relatively cheap liquidity through the Central Bank and emphasized that this raises the question of whether monetary policy is tight enough.
TRY reserve requirements may increase
Banking sector sources pointed out that another problem is that there is excess liquidity in the banking system rather than a deficit, as experienced in previous MPC meetings, and that this situation reduces the effectiveness of the policy rate. The TRY liquidity surplus in the system approached TRY 200 billion as of the previous day. For this reason, sector sources pointed out that after today’s policy rate decision, some macroprudential measures may be taken to tighten TRY liquidity. The banking sector sources said that an increase in TRY reserve requirement ratios is the most likely of these measures, and when this is implemented, deposit interest rates will fall if the banks reflect the resulting cost to the customers and therefore a fine-tuning is needed.
On the other hand, the sources said that the excess liquidity in the market may have been created by the Central Bank’s purchase of foreign currency through banks, and that this would be seen as an increase of several billion dollars in the Central Bank’s reserves.