Turkey: Central bank committed to deliver - ING

Muhammet Mercan, Chief Economist at ING, expects the Central Bank of Turkey to hike its policy rate to 21% with a recalibration of monetary policy in response to weakness in the currency and a further deterioration in the inflation outlook.

Key Quotes

“The CBT has already shown a response to the plunge in the Turkish lira in August by tightening liquidity via shifting funding from the one-week repo auctions to the upper band of the interest rate corridor, with a consequent 150 basis point rise in the effective cost of funding to 19.25%.”

“At the September MPC meeting, we expect the CBT to hike its policy rate (one-week repo) by 325 basis points to 21% while also returning to full funding from weekly repo auctions.”

“The monetary stance will be adjusted at the September MPC meeting in view of the latest developments. Our MPC call translates into 175 basis points of effective tightening from the current funding cost level. Such a move would pull the overnight lending rate and late liquidity window (LLW) rate to 22.5% and 24%, respectively.”