After the Rate Decision…
The CBRT decided as expected. It however declared right after that that it would make changes to some of the measures implemented so far. Introduction of required reserves for the KKM scheme, for instance, means transferring funds from banks to the Central Bank at first. But, this practice continues, banks can be expected to become reluctant to offer the KKM instrument to their depositors.
The recent decline in KKM interest rates from the 35-40% to the 24-30% showed that the banks had decided to collect deposits with low rates and leave the exchange rate burden to the CBRT. I do not find it surprising that the CBRT had noticed this situation and made preparations for required reserve. Due to the fact that the KKM payments arising out of FX rate difference between TRY and foreign currency are now to be covered by the Central Bank, we might expect some distrust towards this instrument. However, the total number of the KKM deposits will probably assure its further effectiveness. However, as of today, the CBRT made an important move to slow down the increase rate of the KKM.
From now on, I anticipate that the government will take steps will to make TRY or foreign currency deposits more appealing to savers, that is, we might expect a return to former economic conditions. Considering that there was no significant movement in exchange rates except the sharp rise at the beginning of the week, it looks like the market did not react adversely to these decisions. Still, there are much more to do to ensure further normalisation of the economy. Even though CBRT Chair Erkan does not have the power to change the general strategy, he is trying to make improvements through some tactical moves. I must say that increasing reserves, keeping an equal distance to all monetary policy instruments, and raising policy rates carefully is the right tactic.
Yet, we do not see any change at all in the main strategy. The Government keeps its policy of reducing budget deficit not by spending less but by collecting more taxes, hence expanding itself. I think that housing and construction campaigns will start again soon, since they are the driving force of their policy. The Government is ready to start the mega projects again the moment they get its hands on the necessary funds. These recent steps of the Central Bank before the local elections only seem to me like not-so-strong efforts to reduce the side effects of the main strategy.
So, when July inflation is announced, we should not be surprised to see that many resolutions in the CBRT’s press statement will turn out to be empty promises. If my calculations match the TurkStat index, I’m afraid we will face a record high monthly inflation. Given that the base effect will not help anymore, a CPI of not lower than 50% will be waiting for us at the end of the year. Unless, of course, TurkStat announces it otherwise.