Central Bank of Turkey likely to lower overnight lending rate by 25bps

The Central Bank of Turkey is likely to lower its overnight lending rate during its meeting tomorrow. According to a Commerzbank research note, the CBT might cut the interest rate by 25 basis points. However, other policy parameters are expected to be kept unchanged. In the coming month, the Turkish central bank might cut RRR too, and tweak to the reserve option mechanism. These moves might be part of a series of monetary easing steps that CBT has taken in 2016. This theme is broadly recognized by markets, and therefore it is unlikely to set off any major moves.

Nonetheless, there is always a possibility that the Turkish central bank might lower the lending rate by 50 basis points, but there is only 5 percent likelihood for such an outcome tomorrow. If the USD/TRY currency pair had been trending lower in recent weeks, the likelihood might have been higher. However, the pair has risen towards the 3.00 market ever since Jackson Hole. Therefore, the CBT is likely to remain wary in the near-term, added Commerzbank.

The central bank management might possibly explain to political counterparts that it is best to let the Fed’s “one and done” rate hike be out of the way, after which there might sufficient opportunity to ease, stated Commerzbank.

The effective funding rate has been slowly drifting lower in recent months as inflation has been on a downturn. For some time, the trend is likely to continue, until at certain point, the Turkish central bank will set up a new unified policy interest rate. The new rate is anticipated to be significantly below the near 8 percent average funding rate now.

In the meantime, core inflation is expected to linger in the 8 percent to 8.5 percent region. This signifies that Turkey’s real interest rate would continue to be negative.

“We see USD/TRY at 3.25 by the end of the year, assuming that the Fed will hike in December”, noted Commerzbank.