Expectations for the CBRT’s wide-term policy stance

The issue of CAATSA sanctions…

Investors’ attention will be on the “CBRT Exchange and Monetary Policy in 2021” presentation that will be announced tomorrow. CBRT President Mr. Naci Ağbal will make a presentation in the online conference, where investors will try to get an idea of ​​the CBRT’s policy stance in the broad term and to understand whether the Bank will increase the interest rates even more. Following the unexpectedly high November CPI data, the necessity of the Central Bank to raise the interest rates on December 24, which is the closest MPC, and whether it will do so is currently the main issue.

Since the issue will be the monetary policy in 2021, of course, there will not be a direct guidance, but in the light of the policies that the Central Bank intends to implement in the broader period, the markets will also make inferences about the December 24 MPC. Inflation is expected to remain in an upward trend in the coming months, due to the additional upside risks that it currently entails. If the Central Bank has entered a new implementation period, it should definitely operate the response mechanism. It should also create a safe space for additional inflation risks, rather than reacting to existing inflationary divergence. With inflation rising to 14% in November, we think that the Central Bank will increase the interest rate by 200 basis points on December 24 in order to achieve the EM standard in real interest and to reach a reasonable real interest position. We expect the current tightness of the monetary policy to continue in the first 6 months of 2021.

We expect an important communication regarding the issue of FX reserves. There are different ways the Central Bank can take to support the FX reserves. There are alternatives such as increasing reserve requirements, Reserve Options Mechanism, foreign exchange inflow with rediscount credits, Treasury’s foreign currency borrowing and swap. Since the main problem is net reserves, we can expect some details to emerge regarding the launch of foreign exchange buying auctions and foreign exchange borrowing rather than instruments such as RR and swap.

Another separate issue is related to CAATSA sanctions… The Senate has accepted CAATSA sanctions and although Trump announced that he will veto, there is nothing he can do because of the 2/3 majority. The first state of the sanctions, as the news in the press and the specific ones regarding, is targeting the defense industry as expected. The sanctions included a ban on all US export licenses and SSB authorizations, and asset freezing and visa restrictions for SSB chief Dr. İsmail Demir and other SSB officers. Sanctions targeting the overall economy and financial system are out of the question at this stage. It is possible that there will be serious diplomacy traffic after that. As will be recalled, Turkey’s biggest argument against sanctions is the reluctance of selling Patriot system, the US equivalent of S-400, in the past. The attitude of the Biden administration on this issue will be important.

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Hibya Haber Ajansı

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