Türkiye | Surprising rate hike with a narrowed corridor

Summary

The CBRT hiked the policy rate by 350bps to 46%, surprising the consensus of no change, and narrowed down the interest rate corridor to 44.5%-49%. Contrary to previous assessments of recent shocks as transitory, the CBRT becomes more prudent hiking its main tool and reaching an availability of the funding rate up to 49%.

Key points

• Key points:
• After the domestic political shock, the CBRT had already hiked the ON lending rate to 46% on March 20th in an interim meeting and started to fund the markets via 46%. They also sterilized the excess TL liquidity completely via an extension of tools and squeezed the TL liquidity even further pushing up the ON TL rates even more.
• Given the heavy depletion from the reserves since mid-March, we evaluate that the CBRT right now prioritizes the efforts to contain any mass foreign currency demand from particularly households.
• In a separate announcement, the CBRT expressed that they will resume one-week repo auctions, highlighting funding via the policy rate. We think, given the uncertainties on the macro outlook and continuing foreign currency demand of the residents, the CBRT might increase the average funding rate towards 49% if needed and try to accumulate reserves as much as possible.
• If the stress continues, the CBRT also opened a clearer door to additional monetary tightening instead of their previous expression of an effective use of monetary policy tools.
• On inflation, despite a more favorable outlook for disinflation led by much tighter financial conditions and positive oil price shock, the CBRT shows a higher degree of prudence by acknowledging the uncertainties ahead and the strength of domestic demand in 1Q25.

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