Turkish Central Bank Has Sufficient Ammunition to Raise Lending Rate by 100bp

Quotes from UniCredit Research:

-The upcoming inflation report gives the Central Bank of the Republic of Turkey(CBT) little choice but to raise interest rates further. CPI in December rose by 7.4% yoy or 0.6pp above the CBT’s forecast. Over the past three months inflation expectations for the coming twelve months have increased a further 30bp. The CBT, when considering the inflation report to be released at end-Jan, will also have to include with a weaker TRY. The basket has lost more than 10% since the last report was released.

-Finally the CBT will have to consider the impact of recently-announced tax hikes, adding a minimum of 0.5pp to CPI. Given that the cost of funding for the banking sector already stands at 7.0%, or just 75bp below the upper end of the corridor. With all of the above in mind, we believe that the CBT has sufficient ammunition to raise the lending rate by 100bp to 8.75%, creating a more even balance between interest rates and FX reserve losses in terms of smoothing mechanisms.

-We believe that a failure to hike will be TRY negative and lead to a widening of the TURKGB curve. Anything less than 100bps in the lending rate will probably not produce any meaningful TRY gains. A 100bps hike should be received very well by markets, translating into a really in long-end TURKGBs and a tightening in Turkey sovereign spreads.The material has been provided by InstaForex Company – www.instaforex.com

Read more here: Turkish Central Bank Has Sufficient Ammunition to Raise Lending Rate by 100bp