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TURKEY - In Brief 19 Aug 2020 by Murat Ucer

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The Monetary Policy Committee (MPC) will hold its regular monthly rate-setting meeting tomorrow (August 20th). We expect the MPC to leave the policy rate (weekly-repo) unchanged, although we would not completely rule out a relatively modest hike. This is broadly in line with (the probability distribution of) a poll we’ve seen (link here, in Turkish), where 13 out of 17 participants forecast no change of the policy rate, while 4 institutions expect 75 bps (3)-to-175 bps (1) hikes.On a more minor note, we think the language regarding the inflation outlook, which has so far remained very dovish and hence, unrealistic, may also be tilted toward a somewhat more hawkish direction.The bottom line though is that the likelihood of a bold move a ‘la September 2018 that would lift the policy rate firmly to positive territory in real terms, is close to nil, suggesting that the CBRT’s gradualist approach to hiking rates, comprised of incremental moves within the “corridor” will continue in the short-term.As a matter of fact, recent developments have been broadly in line with our script (see our post of August 9th and presentation of August 13, 2020), according to which the CBRT has started raising rates within the corridor by fully curtailing the amount of funding provided at the policy rate. The latest one of these steps was introduced yesterday (link here), according to which “banks’ borrowing limits at the CBRT Interbank Money Market for O/N transactions are reduced to half of their current limits effective from 19 August 2020.” As would be expected, these steps already drove both the marginal and average funding rates higher to around 11.3% and 9.3% (as of yesterday), respectiv...