CBRT’s new monetary policy

As expected yesterday CBRT kept all rates on hold. Ahead of potential changes to the overall monetary policy mix, it made little sense to engage in a tightening of monetary policy. The announced changes in the 'Road Map During the Normalization of Global Monetary Policies', effectively mean that the 1 week repo rate will be the primary benchmark because the rate corridor will be narrowed. This will happen during the Fed's tightening cycle, so market participants will have a transparent reference rate in the not too distant future. 

In addition to this and other measures, CBRT announced that the remuneration of USD denominated required reserves will be held close to the upper end of the Fed funds target rate. This move alongside a more flexible FX selling auction policy means that CBRT are cognizant of USD liabilities and are seeking to minimize potential FX volatilities which might result from a significantly stronger USD. 

The problem with this new framework is that it deals with the consequences rather than the causes of TRY's problems, says Commerzbank. Sure, more policy flexibility from CBRT is a welcome development but what the market is looking for and what TRY needs are higher interest rates. Older market participants will be aware of this trick from CBRT - rather than tightening policy in a material manner, they prefer to try and fool the market with 'new' policy innovations.  Judging by the market reaction yesterday no-one is in the mood for being fooled; USD-TRY broke above 2.90, notes Commerzbank.