The Turkish lira extended gains today after the CBRT’s decision to keep the one-week repo rate unchanged at 17%, in line with market expectations. This is the third day of gains against the greenback as improved risk appetite led to a weaker dollar earlier in the week, while much of today’s USDTRY move can certainly be attributed to the strengthening lira following the policy announcement.
For other central banks, keeping rates unchanged usually is no game-changer. For the CBRT, however, living up to market expectations regarding rates provides reassurance to markets that the central bank is fully committed to promoting a disinflationary channel and shifting to a more orthodox policy where the bitter pill of high rates will remain in place until inflation is at least back on track to reach single digits. This meeting marks the start of a slightly more nuanced period for the CBRT after having aggressively hiked rates by a total of 675bps over the last three months. The recent rate hikes helped to pull the Turkish economy back from the brink of a lira crisis and restored some faith in the CBRT, but for now rates are likely to remain at the current level. The CBRT not only stated the tight stance will be kept for a long period, but also pledged to adopt further tightening if necessary – a big win for the central bank’s credibility in the eyes of the market.
Leaving interest rates unchanged at 17% means that the inflation adjusted rate holds steadily above 2% for now, despite the further increase in inflation in December to 14.6% YoY. As long as the CBRT remains committed to promoting the disinflationary channel and supporting the lira and does not loosen rates too quick, the central bank should find support from market participants. A downside risk remains that the CBRT falls back into the predicament it found itself in 2019, where former Governor Centinkaya was fired after not lowering rates rapidly enough to appease political pressure. The question now remains how long authorities can hold real rates positive while attempting to limit the economic damage in the recovery phase.
Considering the CBRT’s hawkish tone on inflation, however, rates are likely to remain at current levels until market expectations shift, which will likely have to be preceded by a dip in CPI.
When this happens, the CBRT will need to tread carefully to meet market expectations despite the incoming political pressure to lower rates and promote growth, especially given investors’ trust issues following the firing of Governor Centinkaya. Until then, markets will continue to examine the credibility and independence of the CBRT.
Lira traders look upon the CBRT decision favourably
Author: Ima Sammani, FX Market Analyst