Turkey: Surprise rate hike will ease currency pressure but is no panacea

  • The CBRT surprised by hiking its one-week repo rate by 200bps today, shaking resistance to rate hikes
  • TRY pressure will ease, but large external imbalances and alarmingly low reserves mean it is not out of the woods yet
  • Further hikes are required, but it is unclear if today’s decision is a one-off or a sign of renewed CBRT independence
Turkey: Surprise rate hike will ease currency pressure but is no panacea

The Central Bank of the Republic of Turkey (CBRT) surprised markets today by hiking its one-week repo rate by 200bps to 10.25%, the first hike since May 2018. The move followed months of resistance to rate hikes, with the CBRT instead tightening by the back door by moving funding to its overnight lending rate (9.75%) and the late liquidity window (11.25%).

The decision follows months of severe pressure on TRY, which was down c22.8% ytd as of cob yesterday and is surpassed only by BRL among major EM currencies. TRY has strengthened by c1% today on the news.

The statement (here) said that “As a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path. The Committee assessed that the tightening steps taken since August should be reinforced in order to contain inflation expectations and risks to the inflation outlook'’.

Today’s hike is an encouraging first step to contain inflation and FX imbalances, but TRY is not out of the woods. With a widening current account deficit, negative real rates, alarmingly low (and falling) reserves, and a massive amount of short-term external debt, there could be a hard stop if the government and private firms are unable to roll over external obligations.

Further monetary policy tightening is therefore required. We hope today’s surprise decision points to renewed CBRT independence and willingness to address underlying imbalances, but it is still too early to tell.

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