Turkey: Central bank to wait until summer before starting the easing cycle - BBVA

Analysts at the Research Department at BBVA, believe that the Central  Bank of Turkey will wait to start the easing cycle after it decided on Saturday to reduced the reserve requirement ration by around 100bps. 

Key Quotes: 

“The CBRT has maintained the tightening stance after the bold rise in interest rates last September (625 bps to 24%) in order to gradually restore credibility and trust. This, and a more orthodox fiscal policy, have clearly paid off as the exchange rate has regained near 25% of its value since then.”

“Rather than considering the reduction of RRR as an early sign of an interest rate cut before the elections, we perceive the decision as the logical response to stimulate credit but avoid a premature rate cut which could put credibility (and the exchange rate) at risk.”

“We believe that the CBRT will expect to observe clear signs of disinflation maybe in summer when the Monetary Policy Committee can start the easing cycle and even implement more aggressive cuts if the outlook allows, and credibility and inflation expectations are clearly anchored.”

“We believe that the CBRT will wait to start the easing cycle when the negative output gap and diminishing exchange rate pass-thru lead to a faster decline in the headline inflation, which will be clearer during summer. Meanwhile the combination of tight stance, verbal guidance and easing macro-prudential policies will help to maintain the tight monetary policy stance and provide some support to the recovery of credit.”