Türkiye | Positively surprising hike from the CBRT

The Central Bank (CBRT) surprised the markets and hiked the policy rate by 500 bps to 50%. They promised to tighten the stance further according to the inflation outlook and support the monetary transmission mechanism in case of unanticipated developments in credit growth and deposit rates.

Key points

• Key points:
• The CBRT also widened the interest rate corridor and set the overnight borrowing and lending rates 300 bps below and above the policy rate, respectively. Widening the corridor is a good signal to show the markets that they want to enhance the room they can adjust even in a daily basis if needed.
• The CBRT became clearer in their commitment against inflation and explained the reason to hike the policy rate as a response to the worsening in inflation outlook. And also, they promised to tighten the stance further in case a significant and persistent deterioration in inflation is foreseen.
• In addition to the increasing challenges on inflation, the recent volatility in the exchange market and disappointing macro-prudential measures implemented to reduce such pressure forced the CBRT to strengthen the monetary transmission mechanism via its main tool even ahead of the local election, which finally supports to gain credibility.
• We expect the CBRT to maintain 50% policy rate for some time and if needed adjust the rate in the revised corridor. Today’s positive surprise might result in downside risk on our near term inflation and growth forecasts. We will assess post-election foreign currency flows and inflation trend, and revise our projections, accordingly.

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