Cosmic Strategist reviews CBRT decision

TURKEY - In Brief 24 Feb 2015 by Atilla Yesilada

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CBRT fooled the markets once again by cutting the O/N lending by 50 basis point and the weekly repo and the O/N borrowing rates by 25 basis points each. The market had anticipated a minor or no cut in the O/N lending rate and 25-50 basis point cuts in the other two. In the accompanying statement CBRT attributed the cuts to the improvement in the core inflation and to its tight monetary policy but somewhat insinuated that the volatility in food and energy prices could lead to a higher-than-expected CPI outturn in February. It also eliminated the sentence that the 5% CPI target could be reached by mid-year in the previous statement, raising Cosmo’s suspicion that it is now counting on a higher oil price or perhaps a somewhat stronger domestic demand because of today’s rate cut, and who knows, more to come to elevate inflationary pressures in the months to come. Initial market reaction was mute, with the Currency Basket and the 2 year bond yield barely budging from pre-announcement levels, but this is not saying much. The full impact of the CBRT decision will be felt after Yellen’s Congressional testimony and Erdogan’s reaction. Cosmo fears that Yellen would sound more hawkish than the latest FOMC minutes, while the meager rate cuts would not appease Erdogan, who may re-launch his campaign to revoke CBRT’s autonomy if he manages to re-write the Constitution after the general elections. In a longer term framework, Cosmo highly doubts whether small rate cuts would have a meaningful effect on the domestic demand, where the real problem could be a lack of confidence in the government’s policies. The Cosmic Dude also bets that Fed will start the lift-off in June, thus eliminat...