CBRT Acts, But Will It Suffice?

TURKEY - In Brief 24 Nov 2016 by Murat Ucer

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The CBRT/MPC hiked the weekly-repo and O/N lending rates by 50 and 25 bps, respectively, at today’s meeting, to 8% and 8.5%, leaving the O/N borrowing rate unchanged at 7.25% (Graph 1). The move is certainly better than nothing and somewhat better than the consensus, and also shows that the Bank is not entirely indifferent to lira/inflation dynamics. Yet, it remains unclear whether it will be sufficient to reverse lira weakness under the circumstances. At the end of the day, the average funding rate (weighted average of O/N lending and weekly repo rates) was already hovering just under 8% prior to the meeting, which means that the move is basically equal to a very modest 25 bps rate hike. The Bank tried to bolster this modest hike with two quantitative measures targeted at easing F/X liquidity in the market by: 1) reducing the required reserves on F/X deposits on all maturities by 50 bps (which is expected to release $1.5 billion to the market – click here for details); and 2) extending the maturity of rediscount credits that are coming due by the end of this year by another 3 months to end-March and more importantly, allowing payment in Turkish lira (click here for details). Needless to say, both moves will be a drain on F/X reserves, the former by directly reducing them and the latter, by not contributing to them. Note that the latter is pretty much the only mechanism at the moment through which net reserves can increase. In its statement, the Bank emphasized upward risks to the inflation outlook, which is not a surprise, given that the lira has weakened significantly over the past few weeks, which should drive core higher in the coming months and worsen inflation ex...