Turkey: Central Bank holds fire in October but tightens rate corridor
October 27, 2020
Contrary to market analysts’ expectations, the Central Bank stood pat and kept the one-week repo rate at 10.25% at its 22 October meeting. Analysts had expected another rate hike to address deteriorating inflation expectations and boost the Bank’s credibility with investors. Instead, policy-makers opted to adjust the monetary policy framework by hiking the late liquidity window to 14.75% from 13.25%, thus raising the cost of funding and supporting the lira in turn.
In deliberating its decision, the Bank noted that while inflation was following a “higher-than-envisaged path” amid the strong economic recovery, September’s 200-basis-point increase to the one-week repo rate and changes to liquidity management had resulted in a notable tightening in financial conditions. Meanwhile, the Bank highlighted that the economy was recovering at a softer pace amid loan growth normalization on the back of prior policy actions. The Bank also expects the current account balance to improve in the coming months, with imports projected to moderate as supportive polices are phased out.
In its press release, the Central Bank struck a largely unchanged tone; however, it did state that the easing of the inflation rate had stopped and needed to be restored, adding that it “requires the continuation of a cautious monetary stance”. At the same time, the Bank signaled that it will continue down the road of liquidity management rather than interest rate changes until the “inflation outlook displays a significant improvement”.
The next meeting is scheduled for 19 November.
The Bank’s decision disappointed market analysts, with Yarkin Cebeci, economist at JPMorgan, stating:
“The latest hike – albeit by stealth – should still help the inflation outlook. However, a covert hike is surely not as effective as a blunt one. Among other things, it raises questions on the commitment of policymakers on prudent policies in a consistent way. The MPC decision was a clear disappointment for the markets and the price action shows this.”
Gökçe Çelik, senior CEE economist at UniCredit, added:
“The MPC also hinted that it will continue to use liquidity measures until the inflation outlook improves. This latter statement implies that the CBRT sees a need for additional tightening in financial conditions, which makes their reason for leaving the policy rate unchanged harder to understand, in our view. […] [The Bank’s] refraining from adjusting its policy and overnight lending rate accordingly sends a negative signal with regard to its commitment to fighting the deterioration in the inflation outlook, in particular, and the credibility of recent normalization steps in economic policy, more broadly. This does not bode well for the TRY, which remains prone to depreciation pressure due to geopolitical risks and capital outflows.”
Author: Jan Lammersen, Economist