The Central Bank has surprised us with its hotly anticipated interest decision. The Monetary Policy Committee increased the policy rate by 200 base points to 19% from 17% with a decision to implement front-loaded and strong monetary tightening. The weighted expectation was a 100 base point increase in the markets.
The tight monetary policy stance will be decisively maintained for an extended period until strong indicators pointing to a permanent fall in inflation and price stability are received, with an eye to the year-end forecast target for 2021.
Considering the strong indicators pointing to a decline in inflation and price stability, the Central Bank will continue to monitor indicators related to the main trend of inflation and pricing behaviors, diffusion indices, demand and cost factors and inflation expectations and whether they are in line with forecasted targets, according to the Central Bank. Additional tightening is possible, if needed.
The 200 basis point increase is the right decision, most economists say. It is a step to forestall the markets. The consensus is that with increasing interest rates in global markets and the inflation factor, the decision to forestall the markets will create a protective shield against potential risks.
In addition, the decision is a strong and a proactive step, according to JP Morgan. The increase is expected to serve the dual purpose of raising credibility and limiting credit growth. Moreover, JP Morgan underlined that foreign investors should be relieved as it appears now the Bank will use in the interest rate mechanism in a more traditional and predictive way.
It’s also worthy to note that following the announcement of the rate increase, which was mostly above market expectations, USD/TRY dropped by over 2% from 7.47 to below 7.35, while EUR/TRY reached 8.70. This morning, those gains have with the USD/TRY and EUR/TRY trading at 7.29-7.30 and 8.70-8.71, respectively.
Oil prices fell sharply with the impact of increased stocks in the U.S. and the International Energy Agency’s (IEA) statement on surplus inventories. Accordingly, Brent crude dropped to USD 63.50 per barrel while the U.S. crude oil declined below USD 60.
Meanwhile, spot gold is trading at around USD 1,745 this morning.
On the political side, the European Union (EU) has suspended its plan to expand its list of restrictive measures for two authorities of the Turkish Petroleum Corporation (TPAO) justifying Turkey’s activities in the Eastern Mediterranean.
The Agricultural Input Price Index increased by 18.52% in January, compared to the same month of the previous year, according to the Turkish Statistical Institute (TurkStat).
The overall export volume index dropped by 1.4% and the overall export unit value index increased by 3.8% in January, compared to the same month of the previous year, according to TurkStat. Meanwhile, the overall import volume index decreased by 9.4% and the overall import unit value index increased by 3.9% in this period.
The number of newly established companies increased by 7.7% to 9,856 in February, compared to the same month of the previous year, according to the Union of Chambers and Commodity Exchanges of Turkey (TOBB). The number of closed companies decreased by 6.7% to 769 in this period.