Summary:

  • Turkish central bank increases its repo rate much more than expected
  • Other rates were also lifted, more tightening promised if needed
  • USDTRY falls to a crucial support

Expectations ahead of today’s meeting were strongly divided, hence a quick upside move on the lira should not be surprising. The central bank chose to hike all rates having at its disposal keeping a deviation from the repo rate (almost) in accordance with its prior statement. The TRY surged across the board, and the currency reached a key level against the US dollar.

link do file download linkReal rates in Turkey got back above zero handing the currency long-awaited relief. Source: Macrobond, XTB Research

Real rates back to positive being an important factor for the TRY

Let us remind that the CBRT decided to simplify its monetary policy framework making the repo rate its official policy rate. At the same time, it ensured that a rate corridor will be 300 bps, but in part it failed to fulfil this promise as a difference between the repo and the overnight borrowing rate equals 350 bps. After today’s meeting rates look as follows:

  • One-week report rate: 17.75% (previously 16.5%)
  • Overnight borrowing rate: 16.25% (15%)
  • Overnight lending rate: 19.25% (18%)
  • Late liquidity lending rate: 20.75% (19.5%)

These hikes came two weeks ago after the bank delivered an emergency rate increase in order to stem a runaway lira’s slump and constantly rising inflation. Right now real rates in Turkey came back above zero which could offer more relief to the TRY as it could draw investors’ attention. On the other hand, there are some risks on horizon which cannot be left out.

General elections among major risks for the lira

The major one is obviously general elections scheduled on 24 June. The latest polls suggest AKP should not have more difficulties to score a victory, albeit things look a bit differently in case of a presidential election. Admittedly, Recep Erdogan is expected to win the first round, he is unlikely to reach a sufficient majority to dodge the run-off. And, if the second round takes place (the most likely scenario right now) Erdogan could find it hard to win as polls point that Meral Aksener, who served as Ministry of the Interior in the past, may constitute a serious impediment for Erdogan. By and large, should the incumbent president failed to triumph, it would be supportive of the TRY given his unorthodox view with regard to monetary policy (he has softened his stance though).

Bank vows to more tightening if needed

At the end let’s back to the statement released along with the rate decision where the bank underlines cost factors being the main driver of the recent surge in inflation. The bank also indicates that domestic demand displays a more moderate course, but even though elevated levels of inflation together with strongly anchored inflation expectations keep posing risks on the price behaviour. Finally, the bank provides that it will not hesitate once more tightening is needed vowing to use all instrument at its disposal so as to reach its price stability objective. Even as it could take time before inflation gets back to desired levels, today’s decision is another step in the right direction implying the the TRY could be already out of the woods.

link do file download linkThe USDTRY has fallen back to its relevant support at around 4.46 being underpinned by a 50% retracement of the whole bullish wave since April. It could be critical place as for where the pair will go afterwards. Source: xStation5