Central bank of Turkey unlikely to change its policy rates at January MPC meeting

In the January MPC meeting on Tuesday, the Central Bank of Turkey is likely to keep all of its policy rates unchanged. The central bank in the December MPC minutes had suggested simplification steps that could start in this month if the decline in global volatility proves persistent. However, the rise in the VIX and MOVE indices which the central bank uses as indicators to track global volatility; further weakening of TRY and rising local bond yields suggest the Central bank is unlikely to tighten its policy.

With markets participants being relatively hawkish and considering the implicit pressures the central bank is facing to cut the O/N lending rate, no action in the January MPC is perceived. Constant inflation and a rising risk of policy errors will likely continue to weigh on the TRY.

"We expect inflation to surge above 9% y/y and to remain high in Q1 16. ......... the CBT is stuck between two different schools of thought (the Basci-Babacan and Erdogan factions) and we think the CBT will opt to do nothing, which is in fact the most hawkish stance that it could adopt, anyway" - Societe Generale.