​CBRT Finally Acts, Avoids the Worst – For Now

TURKEY - In Brief 23 May 2018 by Murat Ucer

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At an emergency interim meeting held this evening in Ankara, the CBRT’s Monetary Policy Committee raised the Late Liquidity Window (LLW) rate – which has been the de facto policy rate -- by 300 bps to 16.5%, from 13.5%, leaving all other rates unchanged (Graph 1). In its brief statement, the Bank said that the [c]urrent elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior. Accordingly, the Committee decided to implement a strong monetary tightening to support price stability”. But it dropped the phrase “…if needed, further monetary tightening will be delivered”.We think today’s action was triggered by, among others, today’s extremely sharp lira depreciation, which was the biggest one-day move in basket terms since 2011 by CBRT data coming atop of several days of sharp weaknesses (Graph 2), Turkey becoming the top news and concern in global financial markets, including in the tweets of economics luminaries (reminiscing about the 1997-98 Asian crisis) and the severely heightened risk of causing a full-blown panic among investors and local residents (loosely measured by the inordinate amount of calls we received today).The good news is that today’s move showed that when the push comes to shove, the CBRT still has the ability to act in order to avoid the worst. As my colleague Atilla Yesilada just noted in his post, it is also true that “this action validates to some extent the muddle through scenario we emphasized in our last Weekly Report.” The bad news is that the CBRT, once again, acted extremely belatedly -- after inflicting much damage on the economy (like through markedly higher inflation) as well as on its already f...