PASHA_BANK ANNUAL REPORT 2021

23 Annual Report 2021 PASHA Bank Coronavirus pandemic continues to create uncertainties over global economic activities. In November, the outbreak of omicron variant, which is considered to be more contagious, caused travel restrictions and measures against pandemic to be re‑introduced in many countries. Interim Preliminary data in November demonstrates that economic activities in USA and Euro Zone Area continue to be dynamic and China is recovering. On the other hand, rapid increases in prices resulting from high energy and food costs caused inflation to cruise around the highest‑ever rates in those countries to remain at historically high levels in these countries. In this context, assessments which state that inflation is temporary are deserted and expectations on central banks’ possibility of tightening monetary policies in the short‑term increased. In its December meeting, Central Bank of England (BoE) increased interest rate, for the first time since in 3 years, raising its policy interest rate from 0.10% to 0.25%. Central Bank of USA (Fed) did not change its monetary policy at its meetings during the year 2021, and kept the policy interest rate at 0%‑0.25% band. Fed declared that they will keep interest rates at existing levels until a significant progress is achieved in reaching inflation and employment targets. Due to rapid increase in oil and food prices, inflation in USA followed a high course in 2021 and as of December, annual CPI inflation increased rose to 7.0%. This figure is the highest inflation rate since 1982. Increase in inflation expectations and the concern that the Fed may raise the policy rate earlier than anticipated, anticipated inflation and concerns around the possibility of Fed’s interest increase to be sooner than expected caused 10‑year maturity USA Treasury Bond interest rate to the US 10 year Treasury bond yields to rise to increase to 1.74% which was the highest level rate of the last year. In its November meeting, Fed decided to reduce its USD 120 million monthly asset purchase program in line with expectations and reduced it by USD 15 million monthly in November and December. Furthermore, Fed decided that it will double the speed of asset purchase reduction in the following months, and increased the monthly amount to USD 30 million. With this decision, it is expected that bond purchases which started during the pandemic will end in March 2022 and interests will increase at least four times in 2022 by 25 basis points each time. US economy grew by 6.3 % in the first quarter of 2021 and by 6.7% in the second quarter with lower impact of pandemic, thanks to expansive vaccination practices. In the third quarter, due to procurement problems and increase in the number of cases caused by delta variant, growth lost speed and the annual growth became 2.3% which was below expectations. US economy performed considerably higher than expectations by 6.9% at the fourth quarter. Thus, US economy which was supported by an incentive package of USD 6 trillion recorded its fastest growth rate since 1984, which is 5.7% on an annual basis. European Central Bank (ECB) did not make any changes in its monetary policy in 2021 and kept policy rate at 0%. In its December meeting ECB confirmed that purchases within the scope of Pandemic Emergency Asset Purchase Program (PEPP) at Euro 1.85 million would end in March 2022. Consumer prices in Euro Area have reached its highest levels in history due to increase in energy costs and problems in supply chain. Annual CPI Inflation reached its historical high level of 5.0% in December. Producer prices cruising around the highest levels in history point out to continuance of inflationary pressures. Annual PPI inflation in the region also rose to 26.2%, its historical high level Consumer inflation is expected to decrease in 2022 in the region. After a recession by 1.1% in the first quarter, Euro Area economy grew by 14.4% in the second quarter and 3.9% in the third quarter on an annual basis. The economy of Euro Area grew by 4.6% in the last quarter of 2021 in line with expectations. Measures taken due to increase in number of cases during the last few months of 2021 affected the growth performance negatively, thus making the annual growth for 2021 5.2%.