Central of Bank Turkey: Surprise cut on the ceiling rate

Central of Bank Turkey: Surprise cut on the ceiling rate

The CBRT kept its policy rate and the lower-end of the interest rate corridor unchanged at 5.50% and 4.50% respectively, but unexpectedly cut the ceiling rate by 100bps. Accordingly, o/n lending rate to primary dealers was reduced to 7.00% (the rest of the market to 7.50%). In addition, reserve option coefficients were raised by 0.1 points for the upper tranches, which would increase gross reserves by USD 0.9bn.

The priorities of the CBRT seem to have shifted from excessive inflows to worries about growth, particularly if capital outflows gain pace. The statement noted that credit growth was higher-than-envisaged during the first months of the year due to strong capital inflows. Yet, the CBRT sees capital inflows weakening due to global uncertainties now; hence, the CBRT could be expecting a slowdown in credit growth in the coming period, in our view. In addition, the CBRT does not seem to be in a hurry to bring credit growth down to its 15% target.

In case of significant capital outflows, the CBRT intends to make it easier for banks to access their FX reserves currently allocated as a result of ROCs. By reducing the top end of the corridor, under a stress scenario, the banks would have cheaper access to the TRY liquidity, and in turn, could be more inclined to release their reserve requirements held in FX. At least we believe this is what is in the mind of the MPC members.

The CBRT’s assessment on inflation has softened. The CBRT now thinks that upside risks on inflation has eased due to slower global growth and the outlook on commodity prices. The bank acknowledges that current account deficit would rise due to stronger domestic demand, yet the current monetary policy framework would limit the increase. Hence, the CBRT stands ready to ease with an aim to avoid appreciation of TRY as well, if deemed necessary.

Today's decision signals a more dovish stance by the CBRT. In the recent weeks, the CBRT has been providing only enough liquidity to meet the market requirement, and as a result, money market rates climbed to around the policy rate of 5.5%, from the lower-end of the corridor (4.5%) during when the CBRT was providing excess funding. A narrower corridor hints that the CBRT intends to continue with its current strategy. All in all, the CBRT has adopted a more dovish tone on inflation and credit growth and may resort to looser policies if deemed necessary.

Selim Çakir
Chief Economist TEB