Turkey: Unexpected monetary tightening but will it really work? – Natixis

Inna Mufteeva, Research Analyst at Natixis, notes that the Central Bank of Turkey made a thoroughly unexpected decision to tighten its monetary policy yesterday by hiking the benchmark repurchase rate by 50bps (from 7.50% to 8,00%), raising the upper bound of the overnight interest rate corridor (from 8.25% to 8.50%), and increasing the late liquidity widow lending rate (from 9.75% to 10%).

Key Quotes

“The move was intended to contain a strong TRY deprecation amid the global strengthening of the USD. Thus, the monetary authorities ended a 21-month-long status quo on the key rate and reversed the monetary policy simplification process (250bp worth of consecutive cuts in the overnight lending rate since April 2016).” 

“The Central Bank acted in the anticipation of the increase in inflationary pressures from the strong currency depreciation (even though the actual inflation is at 7.2%, the lowest level since May) and the gradual rise in energy prices.”

“The “sell-off” on the emerging markets that spurred the significant loss of value of the Turkish lira against USD was brought both by global factors (expectations of a December 2016 rate hike by the Fed and generally more “hawkish” bias in 2017) and local developments (political uncertainty since the failed coup, deterioration of Turkey-EU relations).”

“It is also conceivable that the monetary authorities decided to make an abrupt restrictive change in the monetary stance to demonstrate its independence from political pressures coming from President Erdoğan who advocates an easing of credit conditions for the real economy.”

“Even though, the immediate market reaction was positive with the slight rebound in TRY vs USD, the negative news flow (including the news about the European Parliament vote for the suspension of the accession talks with Turkey) weakened the lira once again on the back of the insufficiency of the measure.”

“Meanwhile, the economic growth suffers from the demise of a very encouraging trend in industrial output (due to the July political shock), difficulties faced by the tourism sector (due to the persistence of the impact from Russian sanctions and security concerns), and standstill in the investment activity (due to still relatively high political uncertainties).”