PREVIEW: CBRT Could Look to Reinforce Credibility with Larger-Than-Consensus Hike

CBRT PREVIEW 24/12/20 1100GMT / 0300ET

• POV: CBRT Could Look to Reinforce Credibility with Larger-Than-Consensus Hike; Median est +150bp
• Governor Agbal is gearing up for a second successive repo rate hike of 150-200bps. Following a spike in headline inflation to 14% in Nov, Agbal has been making all the right noises about the need for policy tightening to achieve price stability, rebuilding reserves without conducting FX purchases and enhancing CBRT credibility through policy orthodoxy.
• The December meeting should focus on anchoring inflation expectations and reducing dollarisation by building credibility and reinforcing wider real yields to support better carry & inflows into TRY assets - bolstering reserves in the process.
• Although the median consensus looks for a 150bps hike to 16.50%, headline inflation is expected to remain sticky at 13-15% for the next six-months - necessitating a wider buffer to offset the risk of further upside surprises. While FX passthrough and credit impulse demand factors should be lower, further tightening is still needed to bring price pressures to below 10% as Agbal has ardently targeted. Should the CBRT show little concern over short-term inflation, a 150bps hike may be favoured.
• Pre-emptive moves to anchor CPI expectations with an above market hike (+200bp to 17.00%) should alleviate concerns about CBRT autonomy, boosting confidence in Agbal's "proactive & decisive" approach to price stabilisation. Agbal will likely reiterate flexibility in using "all monetary policy tools" to respond to future conditions, but may set this as a near-term ceiling to the 1w repo to avoid impeding the growth trajectory too acutely.