Back
29 Jan 2014
Flash: Turkish CB hawkish surprise not as shocking as it seems - BBH
FXstreet.com (Bali) - As stated by Marc Chandler, Global Head of Currency Strategy at BBH, the hawkish surprises from CBT, which follows similar moves by COPOM, RBI (not as dramatic), have helped repair EM sentiment.
Key Quotes
"The Turkish central bank acted aggressively in its extraordinary policy meeting, hiking rates by almost twice what was expected. We saw a 425 bp hike in the overnight lending rate to 12%, , a 450 bp hike in the overnight borrowing rate to 8%, and a 550 bp hike in 1-week repo rate to 8%."
"It added that liquidity going forward will primarily be provided at the 1-week repo rate. Lastly, the bank stated that “Tight monetary policy stance will be sustained until there is a significant improvement in the inflation outlook.”
"One point that’s worth making is the prior to this latest meeting, the central bank had designated the 7.75% interbank money market rate as the key policy rate. So going from 7.75% to 10%, the policy tightening is not quite as aggressive as the headlines suggest."
"There are still some unanswered questions. Where will the average cost of funds (averaging around 7.25% in recent weeks) settle down? How will the rates corridor now at 8-12% be used if lira weakness returns? Monetary policy still remains rather opaque. Minutes will be released within five working days. Until the central bank further clarifies its policy stance, we remain skeptical."
"Indeed, let’s see if this credibility boost can be maintained. After all, inflation has long been too high compared to the 5% target, and also above the 3-7% target range since June 2013. At 7.4% y/y in December, there is a risk of acceleration in the coming months due to the weak lira. Yet the economy is struggling, and we do not think rates can be sustained at such high levels until the inflation trajectory materially improves. Rather, the central bank will likely pare back these hikes if and when sentiment regarding EM and Turkey has improved sufficiently."
Key Quotes
"The Turkish central bank acted aggressively in its extraordinary policy meeting, hiking rates by almost twice what was expected. We saw a 425 bp hike in the overnight lending rate to 12%, , a 450 bp hike in the overnight borrowing rate to 8%, and a 550 bp hike in 1-week repo rate to 8%."
"It added that liquidity going forward will primarily be provided at the 1-week repo rate. Lastly, the bank stated that “Tight monetary policy stance will be sustained until there is a significant improvement in the inflation outlook.”
"One point that’s worth making is the prior to this latest meeting, the central bank had designated the 7.75% interbank money market rate as the key policy rate. So going from 7.75% to 10%, the policy tightening is not quite as aggressive as the headlines suggest."
"There are still some unanswered questions. Where will the average cost of funds (averaging around 7.25% in recent weeks) settle down? How will the rates corridor now at 8-12% be used if lira weakness returns? Monetary policy still remains rather opaque. Minutes will be released within five working days. Until the central bank further clarifies its policy stance, we remain skeptical."
"Indeed, let’s see if this credibility boost can be maintained. After all, inflation has long been too high compared to the 5% target, and also above the 3-7% target range since June 2013. At 7.4% y/y in December, there is a risk of acceleration in the coming months due to the weak lira. Yet the economy is struggling, and we do not think rates can be sustained at such high levels until the inflation trajectory materially improves. Rather, the central bank will likely pare back these hikes if and when sentiment regarding EM and Turkey has improved sufficiently."