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Central Bank of Turkey (CBT) meets Tuesday to decide monetary policy and is likely to hike the benchmark repo rate by 50 bp to 8.50 percent.
Turkey has exceeded its inflation target of 5 percent for a very long time. It has indeed recorded close to double-digit inflation in many years. According to data released by Turkish Statistical Institute and Central Bank of the Republic of Turkey, Turkey's consumer confidence index rose 5.6 percent sequentially to 66.9 in January from December’s 63.4.
Last week, a research paper by CBT staff estimated that average lira pass-through per year in recent years has been around 15 percent. Ongoing lira sell-off has caused domestic manufacturing prices to accelerate from just 10 percent y/y as recently as in November 2016 to around 50 percent y/y now.
CBT's reluctance to maintain a clearly positive real interest rate is adding 15 percent-pts of inflation pressure. It is hence crucial that CBT act decisively soon to stop this spiral. Should the CBT disappoint expectations, the lira is likely to come under renewed depreciation pressures in the sessions ahead.
“We think it will hike 50 bp, even though it SHOULD hike by 100 bp. The bank is also expected to hike the top of the rates corridor by 75 bp and the bottom by 25 bp,” said Research team at BBH in a report.
