MPC: ​No hikes, liquidity steps to continue

TURKEY - In Brief 20 Aug 2020 by Murat Ucer

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Broadly in line with expectations, the Monetary Policy Committee has left the policy rate (weekly-repo) unchanged today, and signaled that tightening through “liquidity measures” would continue instead (link to today’s statement is here).As regards the latter, in a step that has accompanied today’s rate decision, the CBRT raised the required reserve ratios on both TL and F/X deposits, as a result of which, the Bank said, “approximately TRY 17 billion and USD 8.5 billion of FX and gold liquidity is expected to be withdrawn from the market” (link here). We think the latter may partly be met from the swap market, which may partly be the Bank’s intention. (Parenthetically, if it were to happen, this would lead to a decline in net reserves, but leave gross reserves unchanged.)In terms of the content of the statement, there are some immaterial or purely technical updates to the previous statement (link to July statement is here), the only relatively material one(s) being the dropping of the relatively dovish (and unduly optimistic) references to the inflation outlook, so that the Bank is no longer saying, “leading indicators show that monthly price increases have started to slow down in services groups”, or that “[t]he Committee maintains the view that demand-driven disinflationary effects will become more prevalent in the second half of the year”. This probably means that the Bank’s rude awakening regarding the actual inflation outlook is continuing.We will not get into a “normative” discussion as to the wrongs of today’s decision, or the business of how tightening policy through stealth --or these sorts of backdoor mechanisms-- turns the whole monetary transmission process...