We Need Quick Transition to Normalization.

What is currently happening in the foreign exchange market tells us that the Central Bank continues to release the accumulated stress in a controlled fashion.

Private banks do not offer high deposit interest rates unless it is absolutely necessary. Only banks that experience liquidity or ratio problems or seek to improve their funding composition offer high interest rates to foreign currency and TRY deposits. Inflation rates announced yesterday dropped below 40% due to both the base effect and the natural gas prices pushed down to zero by the government, which is important in two aspects: wage and rent increases.

The increase in the earnings of fixed-pay employees who pay monthly rents will be lower as inflation goes down, but the same will apply to rents. However, it is clear that landlords will demand a new rent rate from their tenants who have been renting the same house for over five years, which will probably lead to some legal disputes between the two. Such tenants are already disturbed by the exorbitant rent demands.

“The CBRT Management Likely to Change…”

The pricing behaviour in the market tends to deteriorate when the official inflation rate does not reflect the reality.  If market controls are not performed effectively and negotiations between buyers and sellers are not concluded in a rational way, the gap between the cost of living and the CPI will keep growing.

For this reason, it is very important that Minister Şimşek stays true to his word.

It is not possible to guess whether the inflation rates or the poverty threshold will be taken as basis in adjusting the minimum wage levels in July. In any case, I don’t think that they will be below 10.000 TRY, especially considering that local election will be held within less than a year. Accordingly, we might expect employees, other than minimum wage earners, to demand wage increases.

The CBRT’s rate decision on the 22nd will be determinative of their policy roadmap. I could say that, until then, any changes to top positions overseeing money and capital markets will also serve to define their future policy. If we see both fresh appointments and a rise in the policy rate, we will be talking about new scenario.

If the Central Bank chair changes, this might bring some relief to the USD/TRY exchange rate. We also might expect investors to take dollar positions again unless the foreign currency reserves are replenished soon. In the meantime, the steps to increase the reserves will have an upward impact on exchange rates.

Interest rates, on the other hand, will inevitably rise in tandem with exchange rates.

Meanwhile, the rapid decline in CDS premiums shows how great are the expectations from the President’s new economic team.