Central Bank of Turkey to leave interest rates unchanged

The Central Bank of Turkey's (CBRT's) monetary policy committee (MPC) meets on Tuesday, 23 June. No change is expected  across the interest-rate complex. Since the last meeting, the surprise result of Turkey's election has seen President Erdogan's ambition to increase his power cut short. 

Since Erdogan and his close circle were the most vocal in terms of pressuring the CBRT, the election outcome should allow Governor Basci more leeway in the decision-making process. Nevertheless, this does not mean that the CBRT will change its stance immediately. Market indicators and economics point to the need to hike rates. 

CPI inflation has edged up each month this year, to reach 8.1% y/y in May, and the real policy rate has been in negative territory since February. The Turkish lira (TRY) has broken record lows - again - and USD-TRY is hovering around 2.72 (19 June 12.00 GMT), a 20% depreciation YTD, marking one of the worst performances among emerging-market currencies. 

The CBRT's strategy to tighten liquidity has pushed up interbank market rates to levels even higher than the upper band of the corridor, close to 11%; with the cost of funding surging, the yield curve has inverted. 

"We think the CBRT will most likely hold fire for now, awaiting clarification in terms of the political process, as it is still uncertain whether new elections will be called",says Standard Chartered.

However, it is likely to continue to favour growth over other factors, as long as the CBRT does not think the TRY is depreciating too rapidly and there are no risks in terms of financing the current account.