CBRT Governor Basci's speech indicated that the central bank does not plan to begin its simplification process in the near term. According to Basci, under the present scenario of volatility, the flexibility given by the wide interest rate corridor is very beneficial and that it is very early to think about policy simplification. The latest MPC interest rate report and Basci's comments suggest that the central bank is expected to keep the status quo until April.

Therefore, the interest rate corridor is expected to be unchanged at least until April with the upper band at 10.75%, lower band at 7.25%, and policy rate at 7.50%. Meanwhile, the CBRT is expected to adjust its effective funding rate to alleviate the effect of global volatility on the Turkish financial asset prices and the lira.

Until a new MPC is formed, it is not easy to anticipate the medium-term monetary policy outlook. On 19 April, Governor Basci's term will end, while the four of the remaining MPC members' terms will end before June.

"Currently, we expect policy simplification to start after April. This means we expect the CBRT to narrow the interest rate corridor with the final aim of switching to a single interest rate policy. The governor and the MPC could make this simplification quite swift", says JP Morgan.

However, the process is likely to be gradual due to the current domestic and global uncertainties. Excluding a sudden rebound in global risk appetite and any consequential appreciation pressure on the lira, the upper band of the corridor is likely to be kept unchanged at 10.75%. The CBRT will likely narrow the corridor by raising the policy rate and the lower band of the corridor.

"Currently we would expect a cumulative 150bp hike in the policy rate (bringing it to 9.00%) in the May-July period. The CBRT could be forced to simplify faster or even shift the corridor upward if inflation dynamics worsened sharply or the lira depreciated in a disorderly way", says JP Morgan.