The slight fall in inflation not enough to lower interest rates

The Central Bank is not expected to change the interest rates in today’s last annual Monetary Policy Committee (PPK) meeting. Despite the expectation of a fall in inflation rates, markets are not predicting that the Central Bank will lower interest rates soon.

The Central Bank, it its recent statements, was emphasizing that it would continue its tight monetary policies until the target inflation rate is neared. Thus, market actors, to a great extent, express their expectation that since the target has not been neared, no changes will be made in interest rates.

In short, if the Central Bank decides to lower interest rates in today’s meeting, this will be a big surprise to the markets. There could be those who think the benchmark interest rate will not be changed, but the top limit of the interest rate corridor might be lowered. However, when we take into consideration that the Central Bank has shrunk the liquidity of the Turkish Lira recently to curb the foreign exchange rates; for this reason, the market interest rates have already pressed the top limit, then we can see that this probability is a very weak one.

As of the end of November, the annual inflation rate is 9.2 percent and this rate is expected to slightly fall in December. In the Central Bank’s expectation survey, since June this year, inflation expectations for the first time fell. Inflation expectations for the end of 2014 fell from 9.22 percent to 9.02 percent. Medium-term inflation expectations, which are for the coming 12 months, fell from 7.50 percent of last month to 7.21 percent. The expectation for the coming 24 months fell from last month’s 6.87 percent to 6.72 percent.

The most important factor in the fall of inflation expectations is the low course...