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Turkey hikes rate, solidifies shift towards orthodox policy

  • The CBRT hiked the policy rate by 200bps to 17% today, surpassing the Bloomberg consensus projection of a 150bps hike

  • Today's decision further solidifies the shift towards orthodox policy, but there is always a risk of reversal

  • If the policy shift is sustained, Turkish rates and credits will be interesting trades to watch in 2021

Turkey hikes rate, solidifies shift towards orthodox policy
Tellimer Research
24 December 2020
Published byTellimer Research

The CBRT under the leadership of the new Governor, Naci Agbal, continued to tighten its policy stance today by hiking the one-week repo rate from 15% to 17%, exceeding the Bloomberg consensus for a 150bps hike. With inflation rising to 14% yoy in November, this pushes the real repo rate from 1% to 3%.

CBRT policy rates and cost of funding

The MPC statement cited the recent rise in its end-2021 inflation forecast as the driving factor behind their decision, and said that "tightness of monetary policy stance will be decisively sustained until strong indicators point to a permanent fall in inflation in line with the targets and to price stability."

Turkish inflation

The decision follows a 475bps hike on 19 November, which was accompanied by a unification of policy around the one-week repo rate, and it solidifies the steam of positive rhetoric we have seen from Governor Agbal since his appointment. In a recent video conference, he promised to go all in to curb inflation and build reserves.

The market reacted favourably, with the TRY and Borsa Istanbul 100 Index both appreciating by 0.9% at the time of writing. That brings gains for the TRY to over 11% since the leadership reshuffle at the CBRT and Finance Ministry on the weekend of 7-8 November.


In addition, reserves have begun to pick up from low levels. From a trough of US$13.88bn on 27 November, net international reserves have risen to US$15.65bn on 11 December and US$17.37bn on 18 December.

Net international reserves

The increase in reserves has been supported by an influx of foreign portfolio investment, with US$4bn flowing into the country over the six weeks since the leadership reshuffle at the CBRT and finance ministry (US$2.5bn government debt, US$1.5bn equities).

Non-resident inflows

However, locals remain sceptical that the policy shift will be durable, and have increased their FX deposits by US$16bn over the same period (though the dollarization rate has remained relatively flat at c54.5%).

Resident FX deposits

And, as we have highlighted in recent research, reserves are still in deeply negative territory once FX swaps are taken out and stack up against a short-term external debt stock of US$181bn. As such, the CBRT will have to maintain its tight policy stance, and potentially hike even further in the future, to contain balance of payments pressures and begin to regain the trust of locals and markets alike.

That said, today’s MPC decision is yet another encouraging sign that Turkey is on the path to policy normalisation. While there will always be the risk that Erdogan reverts to his old habits of coercing lower rates once the TRY crisis is seen as over, we maintain that Turkish rates and credit will both be interesting trades to watch in 2021 if the shift towards orthodox economic policy is sustained.

Related reading

Fixed income strategy: Our top picks for 2021, 18 December

Reserve and CPI data paint worrying picture, 3 December

Turkey central bank delivers on rate hikes, 19 November

Lira rally continues as Erdogan appears to make policy U-turn, 11 November

Lira set for big moves amid leadership changes and central bank and MoF, 9 November

Old habits die hard as central bank reverts to stealth tightening, 22 October

Turkish gold rush (in one chart), 5 October

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