The CBRT will announce its monetary policy decision at 14:00 after the Monetary Policy Committee (MPC) meeting to be held today. The market expectation is that the CBRT will increase the policy rate (1W repo rate) at 10.25% by 475 basis points. Thus, the weekly repo rate will increase to 15.0%. In addition, the overnight (O/N) lending rate is expected to increase from 11.75% to 16.0%, and the Late Liquidity Window (LLW) interest from 14.75% to 18.0%.
Within the framework of the current monetary policy, the CBRT does not provide funding to banks through weekly repo. It has also set the limits for banks regarding the O/N lending rate as 0%, so it does not provide funding through this channel as well. However, it provides TL liquidity to the banking system through the traditional auctions it organizes every day, from the late liquidity window when needed and from the swap market. In the traditional auction held yesterday, the average interest rate was 15.02%, and the weighted average funding cost excluding swap (WAFC) was 14.80%. On WAFC basis, the level reached points to a 7.3 point increase compared to 7.52%, the lowest level seen in June. We expect the CBRT to open up space for further tightening with the expected rate hike tomorrow, and to raise the policy rate by 500 basis points to above the interest rates seen in the traditional repo auction.
The rise in exchange rate till a few weeks ago reflected both financial stability and vulnerabilities in price stability. Therefore, what is expected from the CBRT today is to establish financial stability in the foreign exchange market with a tightening that will serve its credibility, and to take an important step for price stability with a statement that will prevent deterioration in inflation expectations and therefore in pricing behavior. These two important targets are too important and difficult to reach, which cannot be reduced to just one rate hike.
Therefore, although the rate decision will cause immediate volatility, the monetary policy framework and the effectiveness of communication of the new Governor will determine the medium-term outlook. With regard to the first one, the basic expectation is to abandon this complex monetary policy implementation and to use the policy rate as the main policy tool, keep it functional in funding composition or to declare the main funding instrument as the policy rate, to make the late liquidity window the last resort to apply, to cancel traditional auctions and to return to a structure where the funding rate will be under the control of the CBRT.
In addition, a clear, simple, understandable and forward-looking statement is needed as the tone of communication will significantly contribute to the renewal of the market’s trust in the CBRT. An important step in this regard may be to place an emphasis on the fact that monetary policy will be managed with measured steps from now on and that the CBRT can take steps in both directions, except in very exceptional cases. Employing those actions may cause the USD / TRY exchange rate, which was traded below 7.70 as of yesterday, to move towards 7.50 and the CDSs to fall further. As has been speculated recently, a hike around 150-200 bps increase in interest rates may pave the way for 8.0 and create fragility on the foreign exchange market and country risk premium over the medium term through the credibility channel of the CBRT.
Özlem Derici Şengül
Spinn Consulting Founding Partner
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