CBT keeps benchmark interest rate on hold, TRY likely to depreciate in short term

The Turkish central bank kept the main policy rate on hold yesterday. The CBT underpinned the Turkish lira but it was not sufficient.  The simplification process, where the change in the monetary policy regime to use just one interest rate rather than an asymmetric overnight interest rate corridor, has not worked successfully, noted Nordea Bank in a research report.

Thus it is not much of a significant that the central bank decided to keep repo rate on hold. In the last few weeks, the CBT has not used the repo facility to give liquidity to the banks. Keeping the main policy rate on hold affirms the broad based impression of a central bank hesitant to undertake appropriate measures to stop the weakening of its currency, stated Nordea Bank.

The overnight interest rate corridor’s upper end was risen by 75 basis points to 9.25 percent. But liquidity given by the CBT at this rate has also been lowered. This signifies that the rate hike, while increasing the average cost of central bank funding, is not the most significant support for the TRY.

Banks in Turkey will have to take the remaining liquidity at the CBT’s late liquidity window that is usually used only in the last hour of the trading day. This is the rate that decides overnight interest rates at the margin and is thus the most significant for the Turkish lira. The Turkish central bank widened its rate corridor by 75 basis points by hiking the overnight lending rate.

“We expect that the central bank will continue to raise its key interest rates, tighten domestic liquidity and ease FX liquidity as the TRY weakens”, added Nordea Bank.

The Turkish lira might continue to depreciate in the short term; however, once the dust has settled, the TRY might be stronger in spite of political risks, higher inflation, FX debt and a subdued economic outlook.