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Turkey: Political turmoil will force CBRT to remain on hold - TDS

FXStreet (Delhi) – Paul Fage, Senior Emerging Markets Strategist at TD Securities, expects the CBRT to keep all its policy rates on hold in tonight’s MPC meeting, i.e. the benchmark Repo Rate to remain at 7.5%, the Overnight Lending Rate at 10.75%, and the Overnight Borrowing Rate at 7.25%. This is in line with the consensus.

Key Quotes

Inflation well above target and moving up: August CPI inflation came out at 7.14% Y/Y, ahead of the consensus 6.86% and up from the prior 6.81%. Core inflation also moved up in August to 7.66% from a prior 7.31%. Furthermore, since the August MPC meeting the Turkish lira has weakened by about 3.5% against the US dollar and almost 6% against the euro.”

...but politics means that rates will stay on hold: However, given the extreme political sensitivity of the issue of interest rate policy, we see little chance of the CBRT hiking, at least until the November elections are out of the way. Indeed recent MPC press statements seem to only consider the possibility of rates moving down. While they state that a cautious monetary policy will be maintained, they also say that “future monetary policy decisions will be conditional on the improvements in the inflation outlook”.”

“The future change that the market really has its eyes on is the simplification of the existing system of interest rates, which will be carried out by making the corridor more symmetric around the Repo Rate while also narrowing the corridor. One of the goals is to move to a single policy rate rather the existing three rate system. The date at which the move to the new system will commence has not yet been fixed, but it will take place during “the normalisation of global monetary policies”, which is presumably code for the Fed starting to hike.”

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