TRY: CBT may tweak some policy tools – Commerzbank

The Turkish central bank (CBT) is unlikely to cut its main repo rate at today’s meeting, so soon after it had to emergency tighten rates inter-meeting following the market blow-up when Istanbul Mayor Ekrem was arrested. Nevertheless, some tweaking of secondary policy tools is possible: for example, CBT might normalise its effective interest rate back towards the 42.50% level by re-opening the weekly repo facility, while perhaps still limiting the volume offered through this facility, Commerzbank's FX analyst Tatha Ghose notes.

No reason to re-start rate cuts

From a fundamental point of view, there is no argument to re-start rate cuts. An examination of recent developments, particularly the rise in inflation expectations and persistent currency pressures (despite ongoing FX interventions), means that the higher effective 46% interest rate (based on the overnight lending rate) should be maintained for now.

"Moreover, despite aggressive interventions to defend the USD/TRY 38.0 threshold, volatility has persisted. USD/TRY has broken through that 38.0 barrier and now trades at 38.10 (which will de facto become the new line of defence). According to local media reports, FX reserves declined by c.$40bn following İmamoğlu’s detention, and net reserves excluding swaps fell to just $19.3bn compared with a March peak at $59.5bn. Such interventions are obviously not sustainable."

"In any case, the use of the infamous rate corridor, once again, is an unmitigated disaster for CBT’s credibility. It will be interesting to observe whether CBT management express the appropriate caution in its wording today, or sound complacent that the situation is already well under control. Any complacency will open the exchange rate up to further shocks."