​MPC Preview: Between a Rock and a Hard Place

TURKEY - In Brief 19 Jul 2016 by Murat Ucer

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Today’s decision will arguably be one of the most critical and difficult ones for the MPC, which is stuck between a rock (politicians’ wrath) and a hard place (fundamentals). So will the MPC be compelled to pause (after a cumulative 175 bps cut of the O/N lending rate) or will it deliver another 25 bps -- or perhaps even a 50 bps cut -- at today’s meeting? Normatively speaking, waiting -- especially after this morning’s Moody’s decision (see below) -- would be the right thing to do, but that is often a poor guide to predicting the CBRT/MPC actions. So what will happen? The bottom line is that while we still would not rule out a cut, the odds of such a move are probably significantly diminished since last Sunday, when we last wrote on the issue. In our Sunday Tracker, we had said, in summary, what the MPC would do mainly depended on how markets would behave till then and that “assuming that relative calm will prevail, a cut of the O/N lending rate – though perhaps a more modest one (25 bps) than previously envisaged (50 bps) – is still the most likely outcome.” We had justified our reasoning based on (our reading of) the CBRT/MPC’s track record, “which is basically about: 1) easing as long as or as far as the markets accommodate, 2) tolerating the lira weakness that might result from this as long as it happens in a reasonably orderly manner; and 3) ignoring the deterioration in inflation and/or inflation expectations, as long as double-digit rates, or related to (2) above, a very sharp lira depreciation are avoided.” Where do we stand as of this morning, Istanbul time? On the side of good news, the market reaction in the early hours of Monday has been relatively muted, ...