Turkey: CBRT to end hiking cycle and keep rates on hold - TDS

Paul Fage, Senior Emerging Markets Strategist at TDS expects the CBRT to keep all its rates on hold at today’s MPC meeting and in particular, the Late Liquidity Window (LLW) rate, which was hiked, by 50 bps at the April meeting, will remain unchanged at 12.25%.

Key Quotes

“The benchmark repurchase rate will remain at 8.0% and the O/ N lending and borrowing rates will remain at 9.25% and 7.25% respectively.”

“Our views are in line with the Bloomberg consensus, with only one analyst out of 13 expecting any change in the LLW rate (a 25bps cut). There is a unanimous consensus that the three other rates will remain unchanged.”

“The Weighted Average Cost of Funds (WACF) is currently at 11.97%, just 28bps below the LLW rate. Just before the April 26 MPC meeting, when the LLW rate was hiked, the WACF was also trading at a similar differential of 27bps below the LLW rate.”

“However, we think the CBRT will feel no need to tighten its monetary policy any more right now. Since the April meeting the lira is slightly stronger against the US dollar and slightly weaker against the Euro. Moreover USDTRY implied volatilities have continued to decline.”

“Inflation is showing signs of peaking, with headline coming in at 11.7% Y/Y in May after 11.9% in April. Core inflation remained unchanged at 9.4% Y/Y in May.”

“Of course, the inflation rate is way above the 5% target, but we do not think that the CBRT has ever really been seriously trying to meet this on a consistent basis. Rather the CBRT will take comfort from the fact that the exchange rate has been stable and that headline inflation will probably start moving down in the coming months in order to justify keeping rates on hold.”

“Indeed as the headline inflation rate moves down the political pressure on the CBRT to start cutting rates will intensify. We think that the CBRT will not be able to resist this pressure.”

“Indeed we think that the CBRT will soon start cutting the LLW rate and bring down the WACF. We expect the first cut will be in July (we had previously forecast a June cut), with 150bps of cuts expected this year. As a result we expect USDTRY to move gradually higher to 3.90 over the course of this year, with the risk of a sharp move higher as a result of policy missteps by the CBRT.”