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In Turkey, the CBRT disappointed consensus and market expectations of 100bp of hikes to the late liquidity window (to 13.25%) by hiking only 50bp to 12.75%. The 50bps rate hike is not sufficed to stabilize the currency, as per our stance.
The Central Bank of Turkey held its benchmark one-week repo rate at 8 pct and raised its late liquidity window rate by a less-than-expected 50bps to 12.75 pct on December 14th, in an attempt to curb rising inflation amid strong economic growth. Annual inflation rate hit a 14-year peak of 12.98 pct last month, way above the central bank's target of 5 pct, and core inflation hit a near record high of 12.08 pct.
Following consecutive inflation misses, inflation inertia is high with 24-month ahead inflation expectations rising further to 8.6 pct in December from 8.3 pct in November. The current account deficit is running at 6.8 pct of GDP in 3-month momentum measures, with financing likely to be more difficult going forward.
Over the past 12 months, $21bn of the $42bn current account deficit was financed by portfolio flows. Such strong portfolio inflows will be very hard to repeat without a more credible monetary policy backdrop.
Additionally, support from local FX selling has now also waned. After selling $10bn of FX between the end of September and end of October, locals have now switched to FX buying adding $5.5bn to holdings since early November.
As such the 50bps hike, which still keeps real policy rate negative vs. headline inflation at 13% yoy, is clearly insufficient. It is projected that the further sharp FX weakness to force the central bank into a more credible tightening. While we remain UW FX and hold an outright USDTRY ATM +0.51 delta call (spot reference: 3.7402) of 3m tenors. You hold this derivative contract on both hedging as well as trading grounds, please observe payoff structure that flies exponentially as the underlying spot FX keeps spiking northwards.
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