CBT MPC: The cat and mouse game

TURKEY - In Brief 27 Aug 2014 by Atilla Yesilada

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CBT surprised all commentators once again, as its MPC decided to keep the reference weekly repo rate steady, but trimmed the ceiling of the notorious “corridor” (O/N lending rate) by 75 basis points. We had anticipated a 25-50 basis point cut prior to the meeting, yet do take the decision as vindication, because no-one predicted a lowering of the corridor. Our “real” economist Dr Ucer is in transit and shall comment on the MPC decision and monetary policy outlook soon. The Political Analyst and his trusty but ill-mannered sidekick Cosmic Strategist are writing this note. The MPC statement was somewhat gloomier compared to the previous, downplaying the recovery in activity, while identifying several upside risks to the inflation picture. The ongoing draught and “geo-political” developments are now added to the inflation risks. CBT maintained its view that monetary policy stance is appropriately tight to eventually reach the 5% inflation target. I think the poor CBT is playing a hopeless cat-and-mouse game between AKP, the realities of the economy and the markets. The O/N rate cut has no meaning except to give AKP a chance to boost that its demands have been fulfilled. I’m not sure whether the “mock” rate cut would appease the new AKP administration. Pro-AKP press has been preoccupied with the extraordinary convention all day, where Prof Davutoglu was duly elected the new chairman, collecting all 1,382 valid votes in a amazing display of third world democracy in action! Only tomorrow will I see whether the AKP and its allies in the press are fooled by the O/N rate cut. If they aren't, Babacan’s reappointment may be in jeopardy. As a parenthesis, Erdogan announced that he...