MNI POLICY: CBRT Hopes To Hold Course After Lira Storm
MNI (LONDON) - The Central Bank of the Republic of Turkey is hoping that its quick intervention and the reduced effect of currency moves on prices seen in recent times will allow it continue with its rate path little disturbed following Wednesday’s extreme lira volatility, though it continues to commit to doing “whatever it takes” to meet its inflation target, MNI understands.
The CBRT sold foreign currency worth USD9 billion via public banks as it sought to arrest a plunge in the value of the lira following the arrest of Istanbul mayor and expected presidential candidate Ekrem Imamoglu.
While the lira plunged by as much as 12.7% against the dollar, its losses were pared back to around 3% following the intervention, a result with which CBRT officials will be relatively comfortable.
Spot market interventions were not needed, a fact officials will regard as positive given the scale of the attack, though these remain part of the CBRT’s toolbox.
RATE PATH
Officials can also still hope that the path of inflation has not been materially affected.
The CBRT cut its key 2W repo rate by 250 basis points to 42.5% at the beginning of March, adding to previous 250bp cuts in December and January, though it had been expected to slow its pace of easing in coming months, maintaining that "all monetary policy tools will be used decisively" to bring inflation back to target.
The central bank will remain vigilant to any financial stability and upside inflation risks, with governor Fatih Karahan not seen departing from his pledge to do “whatever it takes” to slow inflation to 24% by year-end.
Even a lira depreciation of 42% against the dollar would only add 4-5% percentage points to Turkish inflation, given tight monetary policy and a supportive fiscal stance, according to former CBRT Deputy Governor Ibrahim Turhan in a recent interview. (See MNI INTERVIEW: Top End of CBRT Target Range In View - Ex-DG)