Turkey: still comfortably flexible
As widely expected the CBT left the 5-11.5% corridor and the key repo rate unchanged at 5.75% in today’s policy meeting.
The 1W repo auction amount was left at TRY 1-5bn, 1M at TRY 5bn. The CBT raised the FX ratio in TRY reserves to 50% up from 45%, gold up from 20% to 25%.
Figure 1. Benchmark policy and money market rates
Comment: The CBT seems to be happy to keep the policy flexible, noting that they can do “extra tightening” if needed. Inflation dropped to 8.3% y/y in May from 11.1% y/y in April on base effects, but also tightening effects (via higher rates and stronger TRY). Yet it is still above the target of 5% and CBT’s end-year target of 6.5%.
Figure 2. Inflation and expectations
We expect only gradual downward adjustment of inflation from here, as it will likely remain sticky around 8% in the coming months, but still above the 6.5% at the end of the year (provided energy prices do not fall further – our baseline oil price at above USD 100/bbl this year). A modest increase in FX reserve ratio will increase the CBT international reserves further by up to 5 billion USD, increasing the support powder for the worst case scenarios. The other side of the coin – more TRY liquidity for the interbank.
The CBT will likely keep the money markets still tight (liquidity provision at a rate above 8%) for some weeks still, as long as the global uncertainties and risks to TRY persist. But once “risk on” is back, ECB cuts rates and if Fed eases further, the chances of policy easing from CBT becomes very likely in H2. They will first allow the money market rates drift lower. Then we expect them to “officially” cut the upper level of the interest rate corridor by 100bps from 11.5%. We do not see no much easing, however: economy has already showed signs of recovery in Q2 as the credit growth reaccelerated. There is no way the CBT will sleep well the 40-50% y/y credit growth rates again: this would inhibit their target to narrow the current account deficit.
Figure 3. Credit growth
Market impact: no much impact on the news. In the generally “risk off” day for EM FX, TRY keeps among strongest, helped by the decline in oil prices. I has also benefited from yesterday’s credit upgrade from Moody’s. We expect TRY to continue outperform the peers in this environment, and have full policy support if the sentiment worsens significantly. TRY is still among the most attractive currencies in the EM world in terms of carry/vol.
Figure 4. CEE FX performance vs EUR
Figure 5. Interest rate/volatility ratios