Rapidly Improving Turkish Market Environment... "Tightening Policy Expected to Continue"

[Asia Economy Reporter Minji Lee] As the Central Bank of Turkey (TCBM) is expected to maintain a tight monetary policy, it is forecasted that an investment environment will be created starting next month, when normalization effects due to exchange rate stabilization begin to appear.

According to the financial investment industry on the 21st, TCBM held a policy decision meeting on the 18th (local time) and decided to keep the benchmark interest rate at 17%. This is the second consecutive freeze on the benchmark interest rate since January, after it was raised by 200 basis points (1bp=0.01%) to 17% on December 24 last year to curb inflation and defend the lira exchange rate.

On that day, TCBM stated, "The downward impact of pandemic-related restrictions on the economy is limited," but also noted that "there is a prevailing uncertainty regarding the slowdown in activities in the service and related sectors and their short-term outlook."

Accordingly, the exchange rate attempted to break below 7 lira for the first time since August last year, following the early part of this week. Immediately after the announcement, the exchange rate recorded 6.93 lira against the dollar, down from 6.97 lira.

It is estimated that TCBM decided to freeze the benchmark interest rate due to the slowdown in inflation caused by policy effects and overall financial stability. Sungsoo Kim, a researcher at NH Investment & Securities, explained, "The baseline phrase regarding economic recovery was maintained, and the addition of the phrase 'reduced economic impact related to COVID-19' indicates that the overall economic assessment was positive."

The tightening stance is expected to be maintained for the time being because inflation remains at a high level. Last month, the Consumer Price Index (CPI) rose by 14.9%, marking an increase in the rate of rise for five consecutive months. The central bank also emphasized that it will maintain a tightening policy until reaching the target inflation rate of 5%, highlighting that the top priority of the current monetary policy is price stability. Researcher Kim analyzed, "Domestic and external uncertainties related to wage increases due to economic recovery and rising raw material prices could act as potential inflationary pressures."

The Turkish market environment is improving faster than before. The exchange rate has appreciated by about 7.3% compared to the beginning of the year, showing the steepest rise among major emerging market currencies. Due to the currency appreciation, the ratio of short-term external debt to foreign exchange reserves is estimated to have decreased by about 20.8% from its peak to 252%.

The independence of financial authorities also appears to be increasing. The central bank, which has consistently maintained a tightening policy, and the government, which had maintained a more accommodative monetary policy, have accepted this, improving policy credibility. NH Investment & Securities advised making cautious investment decisions after observing the monetary policy in March. Researcher Sungsoo Kim said, "From March, normalization effects due to exchange rate stabilization will appear," adding, "It will not be too late to assess the direction and sustainability of policy operations and make investment decisions thereafter."