Rate Hike Expected, But Unlikely to Stem Market Volatility

• CBRT rate decision due at 1200BST/0700ET
  
• Bank seen hiking one week repo rate by 150-300bps to 11.75-13.25%
• Possible discussion of backdoor liquidity tightening mechanisms, but no formal tweaks to the late liquidity window and overnight rate are expected at this meeting

MNI POV: With inflation still firmly in double digits, there is little scope for sub-150bp hikes. Moderately larger hikes in the 175-225bp range, however, are more likely in an attempt to establish price stability and CBRT legitimacy.

Political opposition from Erdogan is likely to rule out hikes in the >300bp range. As such, a 200bps hike is the most likely outcome to synchronise with evolving market pressures. With the average cost of funding (12.26%) deviating from the 1 week repo rate, the CBRT are expected to close the gap between the two rates.

Much of the recent TRY weakness has been built on negative real rates, and rising geopolitical risk. With year-end inflation expected to rise toward 12%, a 200bps hike today would be the Bank's attempt to keep real rates positive and reduce outflow pressure on the currency.

Should the CBRT succeed in using higher rates to stem market volatility, the Bank may look to start winding down or pausing its unconventional policy tools this meeting - but this seems an unrealistic prospect at this stage. Further rate hikes are unlikely to succeed in delivering price and FX stability, leaving further stealth tightening via the overnight swap rate and late liquidity window more likely as the risks of a balance of payment crisis increase with accelerated FX reserve depletion.

See 0636BST Bullet for more on the funding gap.