Turkey: Possible actions by the MPC - ING

Muhammet Mercan, Chief Economist at ING, suggests that given the CBT’s commitment to deliver, there are three possible lines of action at the upcoming MPC of Turkey in their view.

Key Quotes

“Matching the current market pricing and/or exceeding expectations: Market pricing based on the short-end of the TRY swap curve points to c.450 basis points of upward adjustment priced in over the current effective funding at 19.25%, close to 24%. Back in May, we saw a strong reaction from the CBT but given the TRY plunge and its implications for growth and inflation, which have left the policy rate behind the curve, the bank could come up with a front-loaded hike.”

Measured hike to extend ex-post real policy rate buffer: Given that headline CPI inflation could be close to 20% in a few months, the CBT may opt to hike the one-week repo rate to around 21-22%. Depending on the extent of adjustment in fiscal policy to support disinflation efforts, we could see further action at the October MPC.”

“At the July meeting, one of the reasons the bank kept rates unchanged was so policymakers could see the contribution of fiscal policy to the re-balancing process, as the MTP was released. This may keep the bank's policy action measured once again given that the fiscal response would determine the scale of the policy rate hike. As aforementioned, we see this action as highly likely.”

“Leaving the corridor system entirely and shifting to a single policy rate: In the statement following the August inflation release, the CBT suggested it could “reshape the monetary stance”. Given the strength of the wording, the bank could come up with an unprecedented move of removing the one-week repo rate and picking the overnight lending rate as the key policy rate, which was the case before the introduction of the current corridor system in 2010. Such a move would be unlikely though as the CBT has defined simplification as funding banks from the one-week repo rate.”

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