The CBT moves in the right direction, uncertainties remain

TURKEY - In Brief 28 Jan 2014 by Murat Ucer

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Governor Basci spoke today at the presentation of the year's first Inflation Report. As common sense dictates given the developments to date, inflation estimate for this year was revised upward to 6.6%, from 5.3% earlier. This was driven by food prices (0.3 pp), January tax adjustments (0.5 pp) and lira weakness (0.5 pp). We still think that without significant appreciation of the lira and a break in inflation inertia, the estimate is very much on the optimistic side; we are working with a rate in the 7.5%-8% range. On the much-anticipated issue of tonight's meeting, the Governor first dispelled the growing mystery over the timing of the meeting -- that it is simply timed so as to include MPC member Prof. Yavas, who is arriving from the U.S. (where he is based). It also became rather clear that tonight's meeting will involve rate hikes, though by how much and in what form remains unclear. The consensus, with which we broadly concur, is close to what we wrote yesterday: broadly speaking, some 200-250 bps lifting of the upper band of the O/N corridor is expected (from currently 7.75%), with perhaps a similar adjustment to the Bank's newly introduced rate of 9% that applies to additional monetary tightening days. We infer the latter from the fact that the possibility of raising the rate that applies to the late O/N liquidity window (currently at 10.25%) was also mentioned. What we have here is a move toward "orthodoxy" in terms of monetary policy actions, i.e. the Bank seems to have finally given up on fighting currency pressures without a relatively bold interest rate move. But we doubt that a move toward another important aspect of orthodoxy, i.e. the orthodoxy of the f...