Why Is The CBRT Decision Text Important?

Why is the CBRT decision text important? What do the decision texts explaining the monetary policy mean? We'll look for answers to these questions in Investing.com's analysis.

At the Central Bank of the Republic of Turkey (TCMB) MPC meeting has been held on Thursday, April 15, the interest rate, which was 19 percent, remained unchanged. However, the CBRT changed the text of the decision at this meeting.

What is the Decision Text? Why Do Statements in the Text Matter?

The monetary policy implemented by the central bank by using interest and other additional instruments is a text containing the targets of the center, forecasts and forecasts against existing risks. The monetary policy decision is shared as a text, as it is aimed to enlighten the markets on this issue. While ensuring price stability is the main task for all central banks, strengthening financial stability is among the targets. Parallel to this, the main determining indicator in the monetary policy determined is inflation. In the CBRT, the monetary policy is "the decisions taken to affect the availability and cost of money in order to achieve targets such as economic growth, increase in employment and price stability."

What Does Tight Monetary Policy Mean?

Tight monetary policy is applied in the period when inflation is rising, taking into account the other developments that caused this increase and the changes in other indicators affected by this increase. When we look at the recent past, we witnessed that the CBRT implemented both an expansionary and tight monetary policy many times. When the policies from 2019 are examined; The tight monetary policy, which was implemented during the period of CBRT Governor Murat Çetinkaya, due to the increase in exchange rates, inflation and current account deficit, continued until July 2019. While the interest, which was increased to 24 percent, was kept constant until this period, the following statements were included in the text of the decision: - Economic activity follows a slow course with the effect of tight financial conditions; It is stated here that there is stagnation in the domestic market due to high interest rates. - Developments in domestic demand and the effects of monetary tightening support the decline in inflation. However, the Committee has decided to maintain the tight monetary stance in order to limit the risks to pricing behavior and accelerate the disinflation process; In other words, the tight monetary policy started to reduce inflation, but it was explained that the high interest rate should be maintained for a while in order for the decrease to continue. In July 2019, the process changed completely, and for the first time, a central bank president was dismissed on this date. The reason for this was the failure to fulfill the interest rate cut request. In the first meeting during the term of the new Governor Murat Uysal, the interest rate was reduced from 24 percent to 19.75 percent and the decision text was also changed. Inflation in this period fell from 20.35 percent to 15.72 percent at the beginning of the year, so the indicators gave room for interest rate cuts. The expansion of the monetary policy continued in the period of July 2019 - August 2020. In the epidemic period, that is, in the post-March decision text, while the global risks related to the epidemic were highlighted, the forecast of decrease in inflation remained the same, but the exchange rate continued to see record levels in this process. In August 2020, the interest rate was kept constant, but in the text of the decision, it was pointed out that the credit growth is still continuing on the individual side, and it was stated that due to the increasing risks, required reserves were increased and liquidity measures would continue. These statements meant that the expansionary monetary policy was switched to tight monetary policy. In September 2020, the CBRT increased the interest rate by 200 basis points and in the text of the decision, "It was predicted that the supply-side factors affecting inflation due to the epidemic will gradually disappear in the normalization process and the demand-side disinflationary effects will become more pronounced. It was evaluated that the tightening steps taken since August should be strengthened in order to bring inflation expectations under control and to limit the risks to the inflation outlook." This statement says that the policies implemented have difficulty in keeping with the predictions and that the process has developed against these predictions. During this period, while inflation was at 11 percent, the exchange rate exceeded the level of 7.80 and broke a record. The view that the October meeting was the most uncomfortable meeting in the markets and the most difficult to understand was echoed in the markets. While the tightening that started in August continued with the increase in interest rates in September, it was said that the risks were taken under control in October. As a result of these contradictory decisions and statements in the quarter, the exchange rate increased to 8.58 and broke a historical record. Inflation also rose to 14 percent in the next month due to the exchange rate effect.

If we look at the text of the decision in November;

It was the most hawkish and clearest resolution text of all the above-mentioned decision texts on the recent past. The Committee stated that the increase in the exchange rate will increase the inflation and the tight monetary policy should be implemented decisively during this period of increase. It was stated in the text of this decision that it is also aimed to increase the reserves and that an open and transparent policy will be implemented in this regard. With the implementation of a very hawkish and clear decision text in order to reduce the increasing concerns and increase the confidence, the heat in the exchange rate started to calm down. Tight monetary policy was maintained in the November-March period and the risks created by the credit growth and exchange rate effect on inflation were pointed out in the last meeting and it was announced that it was decided to make a strong additional front-loaded monetary tightening. The CBRT stated that the markets are determined in their monetary policy, said, "The tight stance will be resolutely maintained for a long time and additional monetary tightening will be made if necessary." After the March meeting, the head of the central bank changed again, and the Kavcıoğlu period was met with concern for the markets, who saw that the governor changes that started with Çetinkaya mean a change in policy. In the first meeting of the Kavcıoğlu period, the interest rate was not changed, but quite important changes were made in the decision text. The statements in the previous paragraph have been removed from the text of the decision. During this period, while inflation exceeded 16 percent, the exchange rate rose again from 7.20 to 8.0. Inflation is expected to continue to rise in April and May due to the exchange rate effect in the last month. The statements in the text of the decision are the explanation of the policies applied and are expected to be compatible accordingly. The tight monetary policy implemented during the Ağbal period was easily understood from the text. In the first meeting of the Kavcıoğlu period, removing these hawkish statements from the text was perceived as a transition to an expansionary monetary policy, and the expectation that the center would make a move within the year increased according to the outlook of inflation in the coming months. The monetary policy decision text serves as a tool in the applied policy. To put it more clearly, the policy can be preserved with the correct expressions in the text without increasing or decreasing the interest rate, which is known as "verbal guidance". To give an example from the recent past, the interest rate was not increased in January and February during the Ağbal period, but it was clearly signaled to the markets that the policy would continue with verbal guidance. Based on the indicators, the increase in inflation, exchange rate and current account deficit means that the process is not in line with the expansionary monetary policy.       Source: Investing.com