Central bank of Turkey likely to hike overnight lending rate by 25bps

The central bank of Turkey (CBT) is expected to hike the overnight lending rate in the monetary policy meeting scheduled to be held today. Yesterday’s assassination of the Russian ambassador highlights the laws of unintended consequences; however, markets did not react significantly to it.

Consensus expectations are for the CBT to hike overnight lending rates by 25 basis points to 8.75 percent at today’s meeting, leaving the repurchase rate and the overnight borrowing rate unchanged at 8.00and 7.25 percent respectively, Commerzbank reported.

USD/TRY illustrates a 20 percent appreciation since September, which is a reflection of the stronger USD and deteriorating sentiment towards EM. The lira and lira denominated assets would underperform once sentiment towards EM worsened and this proved to be the case. 2-year rates currently trade around 11 percent, which illustrates the depth of market scepticism towards CBT.

As long as CBT remain reluctant to hike rates the lira will feel the pain. CBT might feel they can get away with negligible rate hikes but they are ignoring the paradigm shift in US rates and the USD. The longer this goes on, the worse it will get for the lira and eventually CBT will have to undertake emergency rate hikes of around 250–300 bps.

"We’ve seen this cycle play out so many times in the past it’s actually become boring. If CBT are serious about reining in lira weakness it will require a durable positive real interest rate profile of around 2.5-3.0 percent. CBT need only look north and see what CBR achieved in the last few years," the report mentioned.