The first
Monetary Policy Committee (MPC) meeting of the year will be held on Tuesday,
January 24. The fact that exactly a week
later the first Inflation Report of the year will be issued, makes this
meeting all the more significant: the brief statement to follow the meeting
will provide initial clues as to the type of monetary policy to be pursued by
the Bank within 2012.
In the first Inflation
Report of 2012, we reckon the CBT will most likely reiterate its claim
that the year-end target will be attained, predicating its argument on the
tightening implemented in the final quarter of last year and the recent
additional tightening. In this case, it seems rather likely that the monetary
authority will refrain from pronouncing a probable interest rate path or the
direction of the monetary policy (tightening/loosening) in its base scenario
for the rest of the year. These will likely be provided in the framework of
alternative scenarios, based on different eventualities in terms of global risk
factors.
As such, the
Bank will probably be inclined to maintain the interest rate corridor policy so
long as market conditions permit. Furthermore,
as interest rate decisions have to be made at the MPC, it will likely have
to provide its guidance as to the ranges within which it targets funding costs
to fluctuate. Based on our calculations, since October 20, the date of
inception of the corridor policy, the average cost of funding is around 7.75%,
while the Bank has opted to keep the cost of funding at 7.50%-8.00% excluding
“exceptional” days.
On the other hand, a
rise in the cost of funding and the general interest rate above current levels
does not seem justifiable at this stage, given i) the retracement in trend
consumer loan growth towards 10% at the end of last year is sustained in the
initial weeks of 2012 as well; ii) the 5% appreciation of the TRL; and iii)
signs of a strengthening in rebalancing of domestic and external demand.
Moreover, potential surprises in the short term in industrial production and
inflation might reinforce this perception.
In
conclusion, at the upcoming first MPC meeting of the year, the CBT is likely to
convey its view that the prevailing tightness level is adequate. The monetary authority is also likely to indicate
that it will continue to respond to potential shocks with the interest rate
corridor policy. In the coming period, the degree to which the cost of
funding will undershoot the average (8%) of the monetary tightening phase, will
hinge on the extent of TRL appreciation. A firming of the TRL in tandem with
an increase in global risk appetite would strengthen the CBT’s hand in its bid
to reduce the funding cost. In the event of stronger-than-expected capital
flows, the CBT may also mull halting the FX sale auctions. In the opposite
case, on the other hand, the cost of funding level would largely hinge on
signals from loan growth, economic activity, and inflation.
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