No interest rate change expected from CBRT's MPC meeting

The Central Bank of Turkey's (CBRT's) monetary policy committee (MPC) meets on Tuesday, 23 June, no change across the interest-rate complex is expected from the meeting. 

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.

Standard Chartered says, "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". 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.

According to Standard Chartered, the policy rate is likely to stay 7.50% and the corridor to stay intact, with the upper limit at 10.75% and the lower band at 7.25%. This complex framework continues to send mixed messages: on one side dovish negative real interest rates and on the other the CBRT's average funding rate at its highest YTD and the interbank market rate even higher than the corridor.

With a weakening TRY feeding into both the CPI and weaker consumer confidence, plus a complex policy framework that has led to a deterioration of inflation expectations, the current policy stance might be self-defeating. Standard Chartered observes, the CBRT might have to hike the policy rate; renewed TRY volatility might push it to do so.