In addition, the Central Bank increased the margin between the interest rate corridor and LLW, the highest lending rate, to 300 basis points and brought the LLW rate to 14.75%. With this move of the Central Bank, leaving the policy rate in the background, deepening its decoupling with the effective funding rate; We conclude that with the active use of the LLW, the Bank will continue to tighten the back door by moving away from the simple monetary policy stance.
Highlights in the CBRT policy statement;
· The normalization trend in commercial and consumer loans became more pronounced.
· The expected softening in imports started with the phasing out of supportive policies linked to the pandemic.
· Strong recovery in exports of goods, relatively low commodity prices and the level of real exchange rate will support the current account balance.
· Inflation followed a higher path than anticipated.
· Following the monetary policy and liquidity management steps taken to contain inflation expectations and risks against the inflation outlook, financial conditions were significantly tightened.
· While increasing flexibility in liquidity management, the MPC decided not to change the policy rate and continue with liquidity measures until a significant improvement in the inflation outlook.
· Following the disinflation process with the targeted path requires maintaining a cautious monetary stance.
In a period when inflation expectations were in a rapid deterioration, the Central Bank weakened the relationship between the funding rate and the policy rate, increasing the risk of further depreciation of TRY and additional deterioration in the inflation outlook. The Central Bank, which started to tighten indirectly during the period when the depreciation of TRY accelerated in August, increased the funding cost from 7% to 12.5% as of October. With daily funding traditional repo auctions, the weight of LLW increased and at the same time, banks whose overnight borrowing opportunities were restricted had to use more LLW. In this interval, the interest corridor, which was updated with a 200 basis point hike in the September MPC, enabled the CBRT to formalize the actual situation and to open up space for additional tightening. However, the fact that the October MPC does not move around the policy rate will mean a change in the direction of the simple monetary policy, and it will also mean the separation of policy interest and effective funding rates.
The Central Bank will continue to tighten indirectly by directing banks to the highest lending rate. The increase in LLW shows that the daily funding cost can go up to 14.75%. Effective use of the interest rate corridor provides flexibility to the Central Bank in terms of switching between funding rates, and places the monetary policy on an unconventional basis. In the previous periods, we saw that the upper band of the interest corridor and the LLW were used as an “acting” policy rate. Interest rates will continue to increase, indirectly with back door tightening. We think that the Central Bank's shift from its direct tightening path towards the back door policy and its continuation may pose a risk to price stability and cause additional deterioration in inflation expectations.
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