CBRT seen easing monetary policy

The Central Bank of the Republic of Turkey (CBRT) is expected to further ease the monetary policy stance during its MPC meeting on Tuesday, said Societe Generale in a research report. The AKP politicians have given approval for the conduct of monetary policy. Market has widely projected the central bank to lower rates, reflecting enhanced predictability of the new Board’s reaction function, noted Societe Generale.

Lucid forward guidance of the Turkish central bank has made it easy to react for the market, even when the current cycle of easing is new for the country against the backdrop of declining global macro dynamics.

The CBRT is expected to lower the upper overnight lending rate by 50 basis points to 9 percent that would lead to around 27 basis points- 30 basis points drop in the average cost for CBRT funds. Also, the central bank is expected to keep the benchmark one-week report rate unchanged at 7.5 percent and cut the lower overnight borrowing rate to 7.25 percent, according to Societe Generale.

The Turkish central bank is moving closer towards a simplified interest rate framework. Lowering in June would bring the central bank closer to unifying the multiple rate system that might take place in July if UK votes to remain in the EU. The unification is not expected to set off a near-term negative market reaction as the gains connected with enhanced predictability of wholesale funding costs might counter the marginal liquidity-tightening facility’ loss, added Societe Generale.

Given the CBRT’s current dependence on the marginal funding facility, the 8 percent-8.25 percent average weighted cost of funding under a simplified interest rate framework seems to be an improved indicator of CBRT’s comfort zone for the new policy rate level.