J.P. Morgan Logo Emerging Europe Emerging Markets Research

Turkey: more creativity and complexity by the CBRT: a partial hike

- The CBRT raised the upper band of the interest rate corridor by 50bp but only for non-primary-dealers.
- The frequency of the extraordinary days will determine the extent of the monetary tightening
- The cautious language used in the interest rate note leaves the door open to further hikes.
The CBRT managed to surprise the markets yet again and introduced extra creativity and complexity to its unorthodox monetary policy scheme further by creating a new interest rate corridor within the already existing corridor. According to survey results, market players were divided between those expecting no change and those expecting a 50bp hike in the upper band (the CBRT’s ON lending rate) of the corridor. The decision came out to be something in-between. The CBRT kept the upper band for primary dealer banks unchanged at 6.75% and hiked the upper band for non-primary dealer banks by 50bp to 7.75%. The other parameters of the scheme (ie the lower band of 3.5%, the policy rate of 4.5% and the ROCs and RRRs) were left unchanged as expected.
Before starting to analyze the decision, we should note that primary dealers are allowed to borrow at a discount from the CBRT only on normal days while on extraordinary days all market players borrow at the more expensive non-PD rate (which is now 7.75%). The decision suggests that on normal days when the CBRT opens its traditional 1-week repo auctions, the upper band of the interest rate corridor will still be 6.75%. However, on extraordinary days when the CBRT refrains from funding the market through 1-week repo auctions, the upper band of the corridor is raised to 7.75% from a pervious 7.25%. This means that inside the normal interest rate corridor of 3.50-7.75% there is now another (and widening) interest rate corridor this time only for the upper band that extends between 6.75% and 7.75%.
GPSWebNote Image
This new scheme will 1) allow the CBRT to increase its effective funding rate swiftly towards 7.75% on extraordinary days when the lira gets under pressure and 2) create extra volatility in funding rates that could discourage the banks from extending new loans and thus helping the CBRT in demand management and thus in bringing inflation down.
Not surprisingly, market participants are having difficulty in evaluating the CBRT decision. This is surely a type of monetary tightening but its impact will most probably not be as large as a regular rate hike or even a regular upper band hike. The extent of the monetary tightening will depend on the frequency of the extraordinary days. Note that the CBRT had only three extraordinary days in the last thirty days. Unless the frequency increases, today’s decision will not produce any result.
The main risk with increased complexity is that of a further loss of interest by the international investors. Given Turkey’s continued need for portfolio inflows, this could create further market volatility. On the other hand, more frequent extraordinary days and thus higher funding rates along with the expected downward trend in inflation would help to recover investor appetite and thus support Turkish financial asset prices.
Looking at the one-page announcement note, we see that as expected the CBRT maintains its cautious tone. Importantly, the note states that “in order to contain the adverse impact of the above-target inflation indicators on the pricing behavior, the Committee has decided to strengthen the cautious stance of the monetary policy” and that “the cautious stance will be maintained until the inflation outlook is in line with the medium term targets’. “ In this respect, additional monetary tightening will be implemented whenever needed.’ This cautious rhetoric shows that the CBRT leaves the door open for further rate hikes if needed.
Elsewhere, the CBRT has slightly downgraded its domestic demand outlook. After saying that “domestic demand follows a healthy recovery”, the Bank now sees “domestic demand growing at a moderate pace”. Finally, the CBRT sounds more upbeat on the external balances. The CBRT emphasizes the continuing improvement in the current account deficit and states that “the current policy framework, with the additional support from recent macroprudential policies, will continue to improve the current account balance.”

(90-212) 319-8599
JPMorgan Chase Bank N.A, Istanbul Branch



The research analyst(s) denoted by an "AC" in this report individually certifies, with respect to each security or issuer that the research analyst covers in this research, that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail research.disclosure.inquiries@jpmorgan.com.

Confidentiality and Security Notice: This transmission may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable law. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution, or use of the information contained herein (including any reliance thereon) is STRICTLY PROHIBITED. Although this transmission and any attachments are believed to be free of any virus or other defect that might affect any computer system into which it is received and opened, it is the responsibility of the recipient to ensure that it is virus free and no responsibility is accepted by JPMorgan Chase & Co., its subsidiaries and affiliates, as applicable, for any loss or damage arising in any way from its use. If you received this transmission in error, please immediately contact the sender and destroy the material in its entirety, whether in electronic or hard copy format.