Encouraging, but still playing catch-up

TURKEY - In Brief 24 Sep 2020 by Murat Ucer

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A step in the right direction, but still playing catch up with reality. This, in a nutshell, sums up our reaction to today’s decision by the Monetary Policy Committee to raise the policy rate (weekly repo) by 200 bps, from 8.25% to 10.25% (simple), which means commensurate increases in both O/N and the LLW rates (see chart below).On the one hand, the move is a positive surprise of sorts because expectations were mostly about either the Bank to leave all rates unchanged, or just to tweak the corridor upwards (which included this author) to create some room for defending the lira, simply because doing nothing would be extremely perilous and risky. In that sense, the move is somewhat better than (we) expected because it is a cleaner execution – i.e. the corridor rose, but so did the policy rate -- also suggesting that the policy rate can be adjusted after all. The open and relatively lengthy acknowledgment in the statement that inflation dynamics played out very differently than the Bank’s earlier forecasts (see statement here), is also a positive, although it came, of course, very belatedly.On the other hand, we think that the Bank is still behind the curve in terms of what is needed to fully stabilize the lira, initiate some capital inflows, reverse dollarization and break inflationary inertia. Put differently, we see today's move clearly as a catch-up of sorts, because after all both the average funding and going money market rates (at 10.7% and 11.1%, respectively, as of yesterday) are already above the new policy rate. This means that the CBRT’s rather convoluted and discretionary funding games within the corridor will continue.Second, the reference to monetary polic...