- Turkish central bank increases its repo rate much more than expected
- Other rates were also lifted, more tightening promised if needed
- USDTRY falls to a crucial support
Expectations ahead of today’s meeting were strongly divided, hence a quick upside move on the lira should not be surprising. The central bank chose to hike all rates having at its disposal keeping a deviation from the repo rate (almost) in accordance with its prior statement. The TRY surged across the board, and the currency reached a key level against the US dollar.
Real rates back to positive being an important factor for the TRY
Let us remind that the CBRT decided to simplify its monetary policy framework making the repo rate its official policy rate. At the same time, it ensured that a rate corridor will be 300 bps. After today’s meeting rates look as follows:
- One-week report rate: 17.75% (previously 16.5%)
- Overnight borrowing rate: 16.25% (15%)
- Overnight lending rate: 19.25% (18%)
- Late liquidity lending rate: 20.75% (19.5%)
These hikes came after the bank delivered an emergency rate increase two weeks ago in order to stem a runaway lira’s slump and constantly rising inflation. Right now real rates in Turkey came back above zero offering relief to the TRY and drawing investors’ attention. Historically clearly positive real rates were needed in Turkey to bring down inflation. On the other hand, there are some risks on horizon which cannot be left out.
General elections among major risks for the lira
The major one is obviously general elections scheduled on 24 June. The latest polls suggest AKP should not have more difficulties to score a victory, albeit things look a bit differently in case of a presidential election. Admittedly, Recep Erdogan is expected to win the first round, he is unlikely to reach a sufficient majority to dodge the run-off. And, if the second round takes place (the most likely scenario right now) Erdogan could find it hard to win as polls point that Meral Aksener, who served as Ministry of the Interior in the past, may constitute a serious impediment for Erdogan. Investors might be concerned if there is a political chaos and any uncertainty regarding the monetary policy independence.
Bank vows to more tightening if needed
At the end let’s move back to the statement released along with the rate decision where the bank underlines cost factors being the main driver of the recent surge in inflation. The bank also indicates that domestic demand displays a more moderate course, but even though elevated levels of inflation together with strongly anchored inflation expectations keep posing risks on the price behaviour. Finally, the bank provides that it will not hesitate once more tightening is needed vowing to use all instrument at its disposal so as to reach its price stability objective. Even as it could take time before inflation gets back to desired levels, today’s decision is another step in the right direction.
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