Turkey: CBRT set to maintain tight monetary policy conditions - Rabobank

According to analysts from Rabobank, Turkish policy makers are likely to maintain current monetary policy parameters unchanged on March 7. They see a strong commitment to tight policy due to persistently high inflation, which is on track to end this year well above the official 5% target.

Key Quotes: 

“Turkey’s central bank is set to maintain tight monetary policy conditions keeping all key interest rates unchanged on March 7. A double digit inflation requires vigilant approach from Turkish policy makers who may send a more hawkish message on Wednesday to reiterate their commitment to tight policy. While a stable lira is an encouraging signal for the CBRT, we are concerned that the selling pressure will resurface in the coming months forcing Governor Cetinkaya to seriously consider a rate hike.”

“The bar for a cut is set relatively high. The disinflationary process would have to accelerate, the lira would have to appreciate (or at least remain stable) and the external backdrop would have to remain favourable for risky assets. Essentially, many stars would have to align for the CBRT to expect a cut. At this stage the next move is still likely to be a hike.”

“The lira is another major driving factor for inflation and the monetary policy. So far this year USD/TRY has been stuck in a narrow range allowing the central bank to keep interest rates unchanged following a hike in December after the pair set a record high at 3.9826.”

“We are, however, concerned that this could prove yet another consolidation followed by a leg higher to a new all-time high as witnessed on previous occasions over the past few years. Various domestic and external factors could reignite the upside pressure on USD/TRY. Recent hawkish comments from Fed Chairman Powell indicated that the Fed may accelerate the pace of monetary policy tightening to four hikes this year. The CBRT would have to respond to that by raising interest rates to maintain the interest rate differential sufficiently wide to make the lira relatively attractive against the US dollar. This in turn would put the central bank on a collision course with those prominent Turkish officials who are firmly against raising interest rates.”