Turkey: The CBRT acts cautious but signals a policy rate cut

Turkey: The CBRT acts cautious but signals a policy rate cut

The CBRT kept its one-week repo rate (the policy rate) and o/n borrowing rate unchanged at 5.75% and 5.00%, respectively. The o/n lending rates, on the other hand, were cut by 50bp. Consequently, o/n lending rate to primary dealers was reduced to 8.5%, whereas o/n lending rate to the rest of the market was cut to 9.00%. Following Governor Başçı’s verbal intervention last week, market’s and our expectations leaned towards a rate cut on the o/n borrowing rate. Hence, CBRT acted more cautious relative to expectations. At the same time, the bank made a conditional commitment to reduce its policy rate and o/n borrowing rate by stating that “If deemed necessary for financial stability, a measured cut may be considered in the policy rate and the overnight borrowing rate in the forthcoming period”. Hence, should the CBRT decide to reduce the lower bound of the interest rate corridor, this would likely to be accompanied with a cut in the policy rate as well. The reserve option coefficients (ROC) for FX were raised by 0.1 points for tranches above 40%, whereas ROCs for gold were increased by 0.2 points for all tranches. The CBRT kept the repo auction limits unchanged at TRY 0.5-6.5bn for one-week repo and a maximum of TRY 4bn for one-month repo.

If the basket exchange rate (50% EURTRY+50% USDTRY) approaches towards 2.00, we believe the bank will make a gradual cut in its policy rate and the o/n borrowing rate. Governor Başçı acknowledged last week that the CBRT eyed certain levels for the real effective exchange rate (REER). According to the CBRT, a REER of above 120 was seen as excessive appreciation of TRY, and this would require measured policy easing. Başçı also noted that should REER exceeded 130, the CBRT would react using all policy tools. Currently, the REER is at around 118, on our calculations.

The assessment on economic activity was kept unchanged, while concerns on inflation eased. The statement reiterated once more that the rebalancing between the domestic and external demand continued as envisaged, and aggregate demand conditions supported disinflation and current account deficit continued to decline gradually. The CBRT also stated that inflation was expected to finish the year below October inflation report forecast (of 7.4%). The CBRT stated that “the second-round effects of administered price increases would be monitored closely”, instead of “a cautious stance regarding pricing behaviour is warranted” phrase in October MPC statement. We expect the inflation to finish the year slightly below 7%, which would give some short-term wiggle room to the CBRT.