19 Ocak 2016 Salı

Turkey: the CBRT remains on hold, drops the reference to policy simplification

- The CBRT has kept all rates associated with its interest rate corridor unchanged

- There is no reference to policy simplification, implying that the CBRT wants to maintain the status quo

- Next week's inflation report will likely provide some policy guidance

In line with our expectations, the CBRT kept all rates associated with its interest rate corridor unchanged. This means that the 1-week repo rate (policy rate) remains at 7.50%, the ON lending rate (ceiling) at 10.75% and the ON borrowing rate (floor) at 7.25%. Perhaps more importantly, the CBRT has dropped the reference to policy simplification in the interest rate note. This means that the CBRT has become nervous about the recent increase in global volatility and wants to keep the interest rate corridor wide as such a wide corridor gives the CBRT the discretion to adjust the policy (through fine tuning its effective funding rate) according to the trend in global risk appetite.

In our preview note, we had expressed our conviction that the CBRT would try to delay any form of rate hikes. After seeing today’s action and the rhetoric in the interest rate note, we have become more confident on this view. The note points to the inflation report to be released next Monday for any policy guidance and it makes sense to wait until then before drawing strong conclusions. However, today’s decision increases the chances that the CBRT keeps the status quo at least until Governor Basci’s term ends in mid-April.

Policy simplification – if delivered in a prudent way – would have made the policy much more understandable and predictable. Hence, market participants will remain uneasy and discouraged as the process gets delayed. The market players are also discouraged by the ambiguity and inconsistency of the policy guidance provided by the CBRT. On the other hand, such delays in simplification reduce the risk of an upper band cut and this should be well received by the markets.

Looking at the interest rate note, we see that most of the critical sentences were left unchanged. In particular, the MPC again stated that “the tight liquidity stance will be maintained as long as deemed necessary.” Furthermore, members again vow that “taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.”

The only somewhat important change in language is that in previous notes, the CBRT was saying that the FX weakness was limiting the improvement in core inflation indicators. This month, they say that “other cost factors” limit the improvement. This implies that the CBRT has become concerned about other factors such as the minimum wage hike and administrative price hikes. This (as well as the reduced risk of an upper band cut) could be taken as a sign that the CBRT has become slightly more hawkish. However, to repeat, market players may need to see deeds rather than words to be more constructive.

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