The Central Bank of Republic of Turkey (CBRT) Monetary Policy Committee (MPC) is scheduled to meet today. The unscheduled meeting comes after the CBRT decided on a 300 basis points interest rate hike on May 23 and announced the normalization in monetary policy on May 28 when it simplified the monetary policy tools, saying it would only fund the markets via one-week repo at an interest rate of 16.5 percent.
While these moves and the results of the meeting of Deputy Prime Minister Mehmet Şimşek and CBRT Governor Murat Çetinkaya in London rallied the Turkish lira last week. Inflation, however, rose to 12.15 percent in May from 10.85 percent in April and remains a top priority for the government and the CBRT's monetary policy.
Şimşek said yesterday that the government will prioritize tackling Turkey's inflation and current account deficit after the June 24 elections. He explained the causes for inflation as exchange rate shocks, high oil prices, tensions with European countries and the U.S.
At the beginning of the year, the $1 was trading at TL 3.78 while the average rate was 3.65 last year. Yesterday, the U.S. dollar/Turkish lira rate opened at around 4.62.
Recalling that the CBRT had taken necessary steps to support the Turkish lira, Şimşek said the government also took macroprudential measures to manage foreign exchange risks.
Çetinkaya and Şimşek were also reported to tell investors in London that the Central Bank may hike rates at today's meeting if the inflation comes higher than expected.
While some economists are expecting a rate hike today, the others claim that the bank would like to observe the impacts of its decisions in late May and would effectively deploy the current instruments in case of a need for additional tightening.
Setting one-week repo at 16.5 percent as the benchmark and equalizing it with the current main funding rate, late liquidity window which the central bank had been using since January 2017, the bank announced that the overnight lending and borrowing rates will be hiked to 18 percent and 15 percent, up from 9.25 percent and 7.25 percent, respectively. The late liquidity window rate rose by 300 basis points to 19.5 percent.
Halk Yatırım Research Director Banu Kıvcı Tokalı claimed that when the financial conditions require additional tightening, the central bank has the opportunity to fund the markets via late liquidity window at 19.5 percent.
"Therefore, before the central bank raises interest rates, it might want to effectively use the current policy instruments," she said.
QNB Finansinvest Chief Economist Burak Kanlı expressed his expectation that the central bank will not hike the rates today because, he argued, the bank raised interest rates by 300 points as it knew the May inflation will increase. Kanlı also referred to Çetinkaya's remarks, stressing that the central bank sees the current interest rates as adequate.
He underscored that the rise in May inflation does not provide sufficiently strong motivation for the bank to increase rates and the bank takes into consideration the medium-term inflation.
Moreover, ABN Amro Economist Nora Neuteboom claimed that the central bank may hike rates by 150 basis points due to inflationary concerns.
İnan Demir from Nomura International also stressed that a 100 basis points hike in the one-week repo rate to 17.5 percent is expected at today's meeting and added that the group also acknowledges a non-negligible possibility that the policy rate will be kept on hold.
He said the Central Bank may well see the tightening it delivered in the extraordinary MPC meeting on May 23 as sufficient to address the deterioration in the inflation outlook.
Morgan Stanley economist Ercan Ergüzel said the bank expects the central bank to be on the conservative side and tighten its policy rate further by 75 basis points to 17.25 percent. "Another 75 basis points in the last quarter to 18 percent is expected with the assumption that fiscal policy will start to tighten after the elections in June," he added.
