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A NEW ERA IN THE CENTRAL BANK AND APRIL 20TH

A New Era in the Central Bank and April 20th
On 12 April 2016, Murat Çetinkaya was announced to be the new president of the Central Bank of the Republic of Turkey. Thus, the Central Bank (TCMB) has kept its tradition of electing an insider as the new President. As is known, starting with Süreyya Serdengeçti, the line of succession continued with Durmuş Yılmaz and continued with Erdem Başçı. And the office is now handed over to Murat Çetinkaya, who previously assumed the vice-presidency position since June 2012, after his previous experiences in banking and participation banks. The new president is only 40 years old and is the youngest person to assume the office.
With the announcement of the new president, the uncertainty is eliminated. Likewise, both the fact that the new president is selected from within the institution, and that he is someone with a previous experience in banking, created a positive vibe in the financial market. US Dollar/TL exchange rate has decreased as far back as 2.82. And now the results of the Monetary Policy Committee are expected, which will be held in April 20th. But will there be a change in interest rates?
The Central Bank seals the fate of the economy with its sound policies. If the interest rate decreases, the economy will flourish, but in the case of an increment, foreign currency rates will spike and an outflow will be experienced.
The TCMB with the presidency of Erdem Başçı previously decreased the overnight lending rate by 25 points from 10.75% to 10.50% and kept the lowest borrowing rate at 7.25% in the last Monetary Policy Committee held on March 25th. The policy rate of one-week repo rate was kept at 7.50%.
The business environment expects an interest rate cut from the Monetary Policy Committee on April 20th. They project that a cut in interest rates will pave the way for businesses and turn the unfavourable situation around the world into an opportunity. Besides, the conditions are ripe for an interest rate cut. But what are these conditions?
A downward pressure in oil prices 
Reversal of interest rate hikes
A decrement of market uncertainties around the world 
A recovery in food prices for the year 2016
The expectation that FED will delay its interest rate hike
All of this suggests that the Central Bank can easily cut interest rates. Another precondition for an interest rate cut is a downward trend in inflation compared to previous periods. In other words, inflation rate determine the interest rate decisions. If inflation is expected to decrease in the upcoming periods, interest rate may be increased. In this period TL increases its value against the US dollar, signalling a decrease in inflation in the upcoming periods. For a potential interest rate cut to be meaningful, inflation rate, which will be announced at the end of the month, needs to be significantly lower than its predictions from last January. This is because if the inflation rate of this month will be on the higher side of what is expected, it will be problematic for the credibility of an interest rate cut. 
In short, within the present cyclical situation it is expected that the next Monetary Policy Committee under the leadership of Murat Çetinkaya will cut the upper interest rate around 0.25 - 0.50 points. Such a decrease will not be a surprise for the financial market due to reasons presented above and the decreasing inflation rates. On the contrary, it would be a surprise if the Central Bank would not announce an interest rate cut against all that's been going on.
Let us see what will come out of the next Monetary Policy Committee, which will be held on the 20th of April under the leadership of Murat Çetinkaya. How will it affect that financial market if the rates decrease or remain constant? Let us wait and see.
Perihan Hazel KAYA, Analyst, Strategic Outlook
21.04.2016 - Hit : 916


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