CBRT: The necessity of tightening for the fight against inflation and for hot money inflow

In the first MPC held after the new head of the Central Bank, Mr. Naci Ağbal's appointment, he simplified the monetary policy with the interest rate increase on paper and directed all funding to the "1-week repo interest" instrument. Thus, the funding composition that was created indirectly in the previous period was set on an official monetary policy basis. The steps that started with simplification were continued with an important verbal orientation; During this period, rhetoric of reform and normalization steps in the economy came one after another. In his presentation "2021 Monetary and Exchange Rate Policy", Mr. Ağbal guided the adherence to Orthodox monetary policies and tightening in the necessary conditions.

We expect financial conditions to be tighter than the current level in this period, in which the emphasis on combating inflation is highlighted. There are additional upside risks in inflation, which reached 14% in November. The latest widening in the PPI-CPI gap reveals the upward trend in the CPI in terms of cost undertaking on the producer side. Producer inflation, which increased by 23.1% annually and 4.1% monthly in November, points to a high increase in consumer inflation in the coming months. In addition, the fact that locals continue to dollarize, reveals that there is still insecurity in terms of the level of exchange rates, and this situation negatively contributes to stickiness in inflation. At the same time, we monitor the effects of climate and seasonal conditions, particularly on food inflation, and the effects of commodity prices on raw material prices. Since there is a decrease in precipitation this year, if drought problems occur in the following months, this will negatively affect the trend in food prices.

Under these conditions, it becomes clear that the fight against inflation should be handled as a whole and policies should be produced in special fields related to this. In order to reduce the dependence on imported inputs in the industry, it is understood that industrial policies should be implemented, and special agricultural policies should be implemented due to the effects of inputs such as pesticide, fertilizing and transportation in agricultural production regardless of productivity.

It is understood that inflation will remain at high levels in the coming months due to the factors we have listed. We believe that the Central Bank should operate the action-response mechanism against inflation risks and take policy moves proactively. Therefore, we do not expect this meeting to be "wait and see". The policy of the Central Bank is in a tightening direction as it will be directed towards "reducing inflation" differs from the direction of central banks such as Fed and ECB. Another issue other than inflation is our need for real interest due to the need to provide hot money inflows. The real interest rate standard, which is in the range of 2-3% in the pandemic conjuncture, is a reference for the position where the interest rate should be.

In the light of all these data; We expect an interest rate hike of 200 basis points, as we see the necessity of locating the interest in a safe zone against additional increases in inflation and to meet the reasonable real interest criteria. Thus, the policy interest will be lifted to 17%. In the following months, we expect the interest rates to be above current levels, depending on the emphasis on sufficient tightness in the fight against inflation.

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