Turkey: CBRT cuts defiant of market reaction - TDS

Research Team at TDS, notes that as they and the market had expected, the CBRT cut the Overnight Lending Rate by 25bps to 8.75% while the benchmark repo rate and the O/N borrowing rate were left unchanged at 7.50% and 7.25%, respectively.

Key Quotes                               

“The decision, the first after the failed coup attempt over the weekend, has provided further evidence of the CBRT’s unwavering dovishness despite a potentially adverse market response. So far today, however, the market reaction has been muted.

To correctly interpret the CBRT’s game plan and put the process of monetary policy ‘simplification’ into perspective, one should recognize that the CBRT is likely aiming at reducing the spread between the lending rate and the repo rate to 25bps only, which would make the rate corridor symmetric ±25bps around the repo.

The CBRT didn’t mention explicitly the coup attempt, but generically referred to “domestic developments [that] have led to fluctuations in financial markets” and that have been dealt with “liquidity measures” announced by the Bank.

Differently from the prior 21 June statement, when the CBRT cut the lending rate by 50bps, the MPC said to have taken a “measured and cautious step towards simplification,” adding the word ‘cautious’ to reflect the softer pace of easing in steps of 25bps instead of 50bps.

The CBRT recognized that “inflation may display a marked increase in the short term due to” food inflation and tobacco prices. However, they continue to see improvements in core inflation to advance gradually.

The rest of the message remains similar or identical to the prior statement. The CBRT seems to willingly ignore the risks that a steady reduction of monetary policy tightness implies for both the inflation outlook and financial market stability.

We continue to see the reduction of the lending rate and the overall tightness of policy as the CBRT’s main policy goal for the foreseeable future, but remain wary that if and when breaking point is reached, sharp TRY depreciation and a rapid reversal of monetary easing will have to follow.”