The Central Bank of the Republic of Turkey met both the market and our expectations today in holding rates steady at 17%. With headline inflation sitting below the one-week repo rate at 15%, real rates remain in positive territory.
Combined with reduced credit growth since the CBRT’s decision in November to remove a rule pressuring banks to extend credit, the current policy stance has been effective in promoting disinflationary forces in Turkey. While this hasn’t been visible in the inflation readings thus far, the policy stance finely balances both political and economic pressures for now; promoting the disinflationary channel and lira recovery without raising the terminal rate closer to the 2018 peak of 24%.
While the current policy stance is proving effective at present, the CBRT isn’t signalling that rates have peaked just yet.
Since the appointment of Governor Agbal, the central bank has consistently voiced that rates will be adjusted higher should economic conditions warrant. Today’s rate statement highlighted this yet again when it stated that the medium-term inflation outlook is being pressured by rising commodity prices, intensifying supply constraints in some sectors, and adjustments to wages and administered prices. For now, the CBRT seems comfortable in biding its time, offsetting these upward threats to the medium-term outlook by committing to holding rates at elevated levels until the disinflationary channel is robust enough to start easing policy. However, any slight hiccups in the upcoming inflation readings will surely place substantial pressure on Governor Agbal’s shoulders as markets will await reassurance from the central bank that real rates will remain in positive territory.
For now, with the lira back below the 7.00 handle – a key level which the CBRT emptied their FX reserves trying to defend back in 2020 – the central bank’s job is done.
The focus going forward will be on inflation dynamics and the central bank’s reaction function. Thus far, Governor Agbal has had it easy relative to his predecessors, but should inflation dynamics not play ball with the inflation outlook that sees CPI fall below 10% by year-end, things could get a lot hairier in markets.
Lira back below the 7.00 level as the recovery in investor sentiment continues, for now
Author: Simon Harvey, Senior FX Market Analyst