Turkey: CBRT to hike rates by 100bps to 18.0% amid market pressures – MUFG

On Thursday, the Central Bank of the Turkey will announce its decision on monetary policy. According to analysts at MUFG Bank, market pressures prompt the CBRT to act. They expect a rate hike of 100 basis points. 

Key Quotes:

“After the Central Bank of Turkey (CBRT) raised its policy rates by a cumulative 675bps to 17% between September and December, we had believed that conventional monetary policy had reach its current cyclical peak. Indeed, since the new economic leadership under Governor Agbal and Finance Minister Elvan came to the scene in Q4 2020, the CRBT has taken prudent measures which have played a pivotal role in reducing the Turkish risk premium. However, recent global economic developments (notably the rise in long-term US yields), the upside risks of the inflation front as well as market pressure on the Turkish Lira (TRY) have strengthened the case for additional tightening.”

“We believe that these risks have crossed the threshold for the CBRT to err on the side of caution and act by rising the one-week repo by 100bps to 18.0%. A more aggressive tightening beyond 100bps cannot be ruled out and would receive a warm reception from global markets.”

“A tighter stance is also justified by the prevailing high external financing requirements, the need to strengthen international reserves and need to promote a durable dedollarisation path.”