Turkey (CBT): Realizing the impossible trinity – Deutsche Bank

Kubilay Ozturk, Chief Economist at Deutsche Bank, takes note that the Central Bank of Turkey (CBT) on Thursday delivered slightly more than what the markets had expected.

Key Quotes

“The MPC kept its O/N deposit rate (lower band) unchanged at 7.25% while hiked key one-week repo by 50bps to 8%. The O/N lending rate (upper band) and late liquidity window were lifted up by 25bps each to 8.5% and 10%, respectively. Accordingly, the rate corridor now stands at 125ps, which is 25bps wider than in October. As expected, CBT accompanied its rate re-calibration with a cut (50bps) in FX reserve requirement ratio (RRR) at all tenors, releasing USD1.5bn FX liquidity, which takes the weighted average ratio down to 13%.”

“Additionally, the Bank also introduced some flexibility onto its export re-discount credit scheme by extending the maximum maturity by one quarter (to end Q1-2017) and also providing an option to make repayments in TRY (rather than in FX). The aim with the final move is to keep more FX liquidity in the economy rather than channeling them into CBT reserves.”  

“While the communiqué is still a close copy of its predecessor, it is getting shorter each time. There are three tweaks this time around. First, having witnessed around USD2bn jump in September, the Committee drops its assessment that the widening in the current account deficit remains limited. Second, the statement now says the slowdown in aggregate demand contributes to the fall in (headline) inflation versus their reference on ‘core inflation’ in October. Such modification is probably owed to the rekindled FX pass-through which will likely lift up both core and non-core CPI in the coming months.”

“The Committee indeed explained the rationale behind its monetary tightening on Thursday as to contain adverse impact of heightened volatility/uncertainty in global markets (and TRY weakness) on the pricing behavior and (CPI) expectations. Third, there is no reference to the framework simplification this time, which blurs the outlook for liquidity management ahead.”