CBT likely to change monetary policy benchmark in August

The Turkish CenBank released its Q3 Inflation Report yesterday. The bank made minor changes to projections, included an upward revision of its end-2015 headline CPI inflation forecast from 6.8% to 6.9%; the CenBank left its end-2016 forecast unchanged at 5.5%, notes Commerzbank. 

The report identified some areas where food price inflation can be effectively tackled, but acknowledged that core inflation dynamic has not been able to improve because of constant lira pressure. CBT's response to this is to introduce a new benchmark interest rate in August - which will be a simplified single interest rate, as opposed to the present 'rate corridor'; the MPC think that this will make policy more transparent to foreign investors. 

Governor Basci informed that the level of this new interest rate would be set at the equivalent of current levels - in other words, there will be no monetary tightening, at least in August. CBT has changed its target policy instrument several times since 2010, first introducing the corridor, then moving back to calling the 1-week repo rate its primary tool, and finally calling all rates of the corridor official benchmarks. 

"At the beginning there had been genuine confusion among investors; but, investors understand the Turkish policy mechanism now; and focussing on transparency alone will not suffice to stabilise the lira through the Fed lift-off. Rather, investors need to see a more positive real interest rate in Turkey - even assuming 7%-7.5% inflation. We forecast 150bps increase in the repo rate (or equivalent) over the coming quarter, and only then we see USD-TRY stabilising in the 2.75 region", states Commerzbank.