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MNI CBRT Review - August 2023: Large Step Toward Restoring Credibility

Executive summary:

  • The CBRT delivered a 750bp key rate hike, well above firm consensus of a smaller 250bp increase.
  • The decision appears to have been based on the bank's confidence that recent adjustments to macroprudential measures are sufficient to deal with recent lira liquidity issues, which hampered monetary transmission.
  • The lira rallied on the decision, with USD/TRY falling as much as 7% on Thursday to June levels.
See the full MNI Review, with sell-side analyst views, here:

MNICBRTRevAug23.pdf

The decision appears to have been based on the bank's confidence that recent adjustments to macroprudential measures are sufficient to deal with recent lira liquidity issues, which had hampered transmission. The most notable change was the introduction of new conversion targets from FX-protected KKM accounts to conventional TRY deposits. KKM accounts currently total at roughly TRY3.4trln ($125bln), more than 28% of all bank deposits. Additionally, the central bank pledged to continue rolling out similar steps. The regulatory tweaks likely helped facilitate the higher-than-expected rate hike, as alluded to by the following line in the policy statement: “recent regulations targeting a rising share of Turkish lira deposits will strengthen the monetary transmission mechanism.”

The larger rate hike may go some way toward restoring confidence in the central bank’s commitment to tackling inflation relative to previous meetings at which the bank delivered smaller-than-expected rate hikes. Nonetheless, it remains to be seen whether such commitment to price stability will be sustained given the bank’s increased year-end inflation expectation of ~60% and with the March 2024 local elections in such close proximity. Market focus will be on any signs that the tightening pace could slow ahead, or President Erdogan’s concerns over high-rate policy make a return. Overall, the CBRT’s decision is seen as a necessary step toward restoring central bank credibility, although the persistence of negative real rates will mean further tightening is required ahead.

HomepageCEMEA Bank - ReviewCentral Bk Republic of Turkey - ReviewEM Central Bank ReportsEM Central Bank ReviewEmerging Market News

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