A new interest rate reduction?

WE WILL EXPERIENCE the first stress test of the new year this week, following 15 days of peace and silence. The Monetary Policy Committee will announce the first rate decision of the year on Thursday. A change in the interest rate may have major economic effects not only for January but also for the coming months.

Other important data will also be released for the country during the week, including budget realizations, housing prices, and the consumer confidence index. Outside of Turkey, Germany and Eurozone inflation and China’s 2021 growth rate data will also be published.

BUDGET RESULTS

We will start the week with the December results of the central government budget. With this data, the picture for the Turkish economy in 2021 will become clear.

The target for 2021 was that budget expenditures be TRY 1.35tr, revenues be TRY 1.1tr, and the budget not exceed a TRY 245bn deficit. As of the end of November, 98% of the expenditures were realized. On the revenue side, the target has been exceeded by far. The total revenue reached TRY 1.27tr by the end of November. The reason for this is that the 11-month tax revenues exceeded the target by TRY 130bn and interest income by TRY 42bn. In terms of taxes, the item that exceeds the budget target the most was corporate tax revenues. Corporate tax revenues, which are expected to be TRY 105bn, increased to TRY 175bn in the first 11 months of 2021.

The Medium-Term Program, which was announced last fall, forecasted the 2021 central government budget deficit as TRY 230bn and its ratio to GDP as 3.5%.

HOUSING PRICES WILL CONTINUE TO RISE

Following the construction cost index announced last week, the Central Bank will announce the November housing price index on Tuesday of this week. The construction cost index increased by 8% compared to October and by 48.9% compared to 2020, reaching 348.5 in November. We will see a similar increase in housing prices as well.

The increase in housing prices, which have doubled since the beginning of 2018, will continue. Climbing construction costs, rising inflation, continued growth in real housing demand, and supply shortages in some regions are pushing prices up. On the other hand, the fact that deposit rates are negative in real terms makes housing a more preferred investment tool compared to recent years.

ANOTHER DISCOUNT FROM MPC?

The most anticipated news of the week is the interest rate decision, which will be announced on Thursday afternoon. The Monetary Policy Committee (MPC) reduced the interest rate from 19% to 14% from September-December. The policy rate was reduced by 5 points, while inflation increased by 16 points after September.

Emphasizing inflation and tight monetary policy in all the statements made before September, the Central Bank changed its attitude in recent months. There is no sign that the attitude exhibited since September changed during the fluctuation in foreign exchange rates in November and December and the monetary easing process observed since December 21. There was no statement from any official saying, “We will fight inflation through tight monetary policy.” Therefore, there is currently no possibility of an interest rate increase in this month’s meeting.

Participants in the latest market participants survey also do not expect a new discount on the interest rate. We can say that the probability of getting a discount, albeit very low, is higher than the probability of an increase. Although the policy rate cut does not lower market rates – all interest rates are actually increasing – the MPC’s tendency is in favor of the cut in upcoming meetings.

CONSUMER CONFIDENCE IS CURRENCY SENSITIVE

January consumer confidence index will be announced on Friday morning. Consumer confidence, which reached its highest value of 86.7 during the tenure of former CBRT Chairman

Naci Agbal, fell in six of the following eight months.

In the index, which was at a record low level of 71.1 in November, several factors paved the way for the January data to either lower or higher. The price hikes and the inflation index, which reached its highest point in 20 years, likely had a downward effect. On the other hand, wage increases and the decreasing tension in exchange rates likely had a positive effect on the index. Whichever one of them outweighs the other will determine the movement of the index. However, consumer confidence may be more sensitive to the decrease in foreign exchange rates in this period. Therefore, we might see a slight increase in the index.