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MNI CBRT POV: Transmission Mechanism in Focus, Despite Smaller Rate Hike

TURKEY
  • While the CBRT were widely expected to continue with their tightening cycle, sell-side estimates ranged between a 150-500bp rate hike, making the CBRT's 250bps step on the lower end of expectations.
  • The USD/TRY exchange rate reacted little to the decision, however, when the CBRT raised the one-week repo rate below expectations in June, this preceded a 10% drop in the value of TRY against USD over the next week, highlighting the down-side risks to TRY from the inefficient transmission of tighter monetary policy and thus threatening further lira depreciation going forward.
  • A specific mention of QT and "selective credit tightening" shows the bank's concern with policy transmission, and could partially explain the slower pace of rate hikes. The CBRT stated that FDI and higher tourism income will help Turkey narrow the deficit in its current account and rein in inflation, therefore substituting for greater rate hikes - and follows this morning's announcement of an investment deal worth upwards of $51bln with the UAE.
  • Policy tweaks already reportedly include increasing lenders' TRY reserve requirements for KKM accounts, thereby permanently withdrawing excess liquidity – another alternative tightening step to raising the policy rate.
  • Our full review of the decision, with sell-side analyst views, will be released tomorrow.
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