Return to orthodoxy?

TURKEY - In Brief 27 Jan 2014 by Murat Ucer

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Today's market developments, with the TL/$ heading to just below 2.4 despite an additional tightening day, prompted the Bank to call an extraordinary meeting. The meeting will be held tomorrow night, and the decision will be announced at 12 a.m. midnight local time. Before that, we have the Inflation Report presentation by Governor Basci tomorrow morning, starting at 10 a.m. What is happening? We would like to think, like pretty much everyone else, that the Bank is finally ready to turn to some sort of "orthodoxy", by most likely raising the upper band of the corridor (currently at 7.75%) by at least 250-300 bps, and committing to keeping money market rates around there for the foreseeable future. This, together with an indication that rates could be lifted further if need be, would help to calm the waters for the time being, in our view. So in addition to a significant and permanent hike, the Bank has to be very clear and bold in its signal that it won't hesitate to do more. Anything less, like a modest hike or another indecisive or timid message, could backfire and amplify the selloff. Some investors have asked us whether less orthodox measures may be in the works. We do not think so, as we think further experimentation of any kind -- or any deviation from some version of the above-mentioned orthodox option -- would be a lot more damaging to the economy as well as to the political establishment, than a substantial rate hike at this point.