CBT Governor Basci statements

The CBT Governor Basci made a presentation on monetary policy and answered questions in a panel discussion. Main highlights from his speech are;

-          The CBT expects inflation to decline in the next couple of months. It will announce its end-year and next year forecasts in Inflation Report to be released at the end of October but a close number will be revealed in Medium Term Program that government will announce before October 15th. (We also expect inflation to decline going forward however it would significantly stay higher than the CBT’s current end-year estimate of 6.2%)

-          The CBT emphasized the importance of predictability stating that the forward guidance is an important tool if there exists credibility and the clearer the policy message from Fed, the better. (Similar to Fed’s forward guidance about interest rates, the CBT Governor previously announced that the money market rates would be constant till inflation gets in line with forecasts).

-          Regarding 1.92 US$/TL level, Mr. Basci stated that the real effective exchange rate as of September is below 110 and it shows the currency is over depreciated. This would get back to normal under normal market conditions, says Mr. Basci and carry the exchange rate to lower levels. If capital flows gets stronger next year it may further fall to 1.8. The CBT shares its views on exchange rate so as to give a feeling about direction. Additionally, the CBT Governor says that the CBT’s underlying exchange rate assumption for 6.2% end–year inflation forecast is 1.92. Due to higher exchange rate, end-year inflation is expected to stay between 6.2% and 7.4%. (This seems more like a retreat from 1.92 quote which Mr. Basci strongly defended in its previous TV interview. We are likely to see an upward revision in this forecast and thus inflation forecast in the next Inflation Report)

-          As for monetary policy, Mr. Basci stated that interbank money market rate is currently 6.75% while average funding rate is lower as the CBT also funds the market from 4.5% via one-week repo auctions. Additional monetary tightening may be introduced if the CBT sees a threat against inflation outlook. The CBT would only increase policy rates in case 24-month ahead inflation outlook deteriorates. The CBT will keep monetary policy tight and cautious until inflation complies with forecasts. That’s why market should not wait either policy rate hike or policy rate cut in the near future, says Mr. Basci.

-          FX reserves accumulated via ROM are currently US$30bn and required reserves on FX deposits are US$29.2bn. The CBT may use its reserves in case of strong attack against currency. The CBT would lower RRR on FX deposits and ROCs if need be but the Governor Basci does not expect it to materialize. Regarding the CBT Governor’s previous statement about surprising moves from the CBT, Mr. Basci stated that he meant unsterilized FX interventions that could be used surprisingly in the period ahead. (Though the CBT does not use direct interventions anymore, it may open higher amount of FX selling auctions in case of a turbulence in market)

-          Sensitivity of Turkish 10-year to US 10-year bond yields have increased, says Mr. Basci. It should be lower than 1bps however it is now higher. This means that when US interest rates increase 0.1bps, our bond yields increase more than 0.1. This should not be the case. Market react to the rise in US bond yields as if the CBT would control the currency by hiking money market rates and trigger 10-year bond yields. As the CBT did not raise interest rates, bond yields eased, investors took the message and started to enter into the market. Mr. Basci adds that there are significant inflows to FX market. Yet, exchange rates do not ease because corporates are buying FX to close their open positions, offsetting the positive impact of FX inflows. (Market reaction to Mr. Basci’s statements has been negative as market believes that the inflation outlook has deteriorated but Mr. Governor thinks that it is temporary. Having eliminated interest rate hikes and also not so clear message as to how the CBT would react to external shocks led to a sell off in government bonds, equity and FX market. Having seen 77,495 at the highest, BIST-100 closed the first session at 76,895 while 2-year and 10-year bond yields edged up to 8.07% and 9.10% respectively after the announcements against 7.89% and 8.94% opening values. US$/TL and exchange rate basket are hovering around 2.0030 and 2.3518 respectively, 0.84% and 0.75% higher than their opening levels)